crop and fuel market conditions in the current marketing year, not
the RFS. Waiving the mandate, a minimum use requirement, has limited
market impact if people were going to use almost as much as the
mandate anyway.'' FAPRI-Missouri study at 1.
---------------------------------------------------------------------------

    Babcock-Iowa State looks at the impacts of a waiver of the
conventional fuel component of the RFS requirements under two cases: a
``full'' and a ``flexible'' mandate compared to a ``no mandate'' case.
In the ``flexible'' mandate case, Babcock assumes that there are 2.4
billion rollover RINs for the 2012/2013 corn-marketing year. Comparing
the ``full'' and the ``flexible'' mandates, average corn prices
decrease significantly, by $1.91 per bushel. As discussed in the
Babcock paper, the ``full'' mandate is not a realistic scenario, since
it assumes there will not be any carryover RINs available in 2013.
Based on the empirical RIN data discussed above, EPA is confident that
there will be a significant number of carryover RINs in 2013 unless
ethanol production changes drastically in November and December of
2012. Therefore, the ``full mandate'' results should only be considered
as a bounding exercise. Comparing the ``flexible'' to the ``no''
mandate scenario, average corn prices decrease by roughly $0.58 per
bushel across all runs--a decline of roughly 7.4 percent. By way of
comparison, in the EPA analysis eliminating the RFS requirements would
result in a decrease in average corn prices of roughly $0.07/bushel, on
average across all runs.
    One of the key differences between Babcock's results and the
results presented in EPA's analysis above is how responsive ethanol
demand is to the relative prices of unblended gasoline and ethanol.
Babcock assumes that

ethanol demand is more responsive to changes in prices, meaning his
analysis assumes refiners and blenders have more flexibility to
substitute away from ethanol in response to a waiver. In light of the
limitations on refiner flexibility identified in Section V.1.d above,
we believe that our assessment of refiner flexibility, performed in
consultation with DOE, is a better reflection of current conditions. In
addition, Babcock's analysis uses older WASDE data (which reflects
larger uncertainties in corn yields) and older gasoline price data (in
which the average gasoline price is lower than the October STEO).
    The Purdue/Farm Foundation study looks at different levels of
drought (e.g., a weak, median and strong drought) and different
combinations of ethanol blending levels, which could be achieved either
with a waiver or the use of conventional RINs (e.g., 11.8, 10.4 and
7.75 billions of gallons of ethanol). They conclude that if refiners
and blenders have flexibility to reduce ethanol usage in the short
term, use of prior blending RINs credits and/or a large waiver could
reduce average corn prices by roughly $1.30/bushel of corn.
Alternatively, a more modest waiver may reduce average corn prices by
roughly $0.47/bushel of corn. As stated in the paper, results of the
analysis are highly dependent upon how much flexibility is assumed to
exist in the refining sector. Depending on the degree of refining and
blending flexibility (and the severity of the drought), Purdue's
``range of corn price impacts from a partial waiver is zero to $1.30/
bu.'' \73\ Their results therefore ``bracket'' the results projected by
the ISU model.
---------------------------------------------------------------------------

    \73\ An updated version of this study is discussed below.
---------------------------------------------------------------------------

    Similar to the Babcock-Iowa State study, a large part of the
difference in the agricultural sector impacts (e.g., commodity price
impacts) between the Purdue/Farm Foundation study and EPA's analysis is
due to the responsiveness of ethanol demand to the relative prices of
unblended gasoline and ethanol. Our review of multiple external
analyses including the studies cited above in Section V.1.d,
consultation with DOE, and review of comments that we received,
suggests that ethanol demand, particularly in the short-run (i.e., the
one-year, the 2012/2013 corn marketing time frame of a possible waiver)
would be relatively unresponsive. Even if the U.S. fuel system could
adjust and reconfigure to use less ethanol in the 2012/2013 time frame,
the economic circumstances of ethanol and gasoline production are such
that there would continue to be an economic incentive to blend ethanol
into gasoline, particularly if the expectation is that drought
conditions will subside and corn production in the U.S. will return to
more typical (e.g., pre-drought) levels as early as the 2013/2014 corn
marketing year.
    For the reasons discussed above, we believe these external studies
find potential impacts of the waiver that are similar in scope and
direction as the analysis that EPA conducted. Whereas some of the
external studies present a range of results from varying key
assumptions, our analysis uses a stochastic approach to capture
uncertainty in several key variables. Where a stochastic analysis was
not possible (e.g., on the refinery flexibility issue our review of
multiple external analyses including the studies cited above in Section
V.1.d, consultation with DOE, and review of comments that we received,
suggests that ethanol demand, particularly in the short-run (i.e., the
one-year 2012/2013 corn marketing time frame of a possible waiver)
would be relatively unresponsive. Other agricultural analysis primarily
discussed this issue qualitatively.
    Edgeworth Economics undertakes a scenario analysis to estimate the
impacts on various sectors of the U.S. economy of a waiver of the RFS
volume requirements. Based upon their review of recent studies (e.g.,
Babcock-Iowa State, Purdue/Farm Foundation) of the impacts of a waiver,
Edgeworth Economics uses a decrease in average corn prices of roughly
$0.52/bushel to estimate these impacts. They estimate that a waiver
would decrease feed costs across the U.S. by roughly $3.1-$4.7 billion
in the 2012/2013 crop marketing year. The low end of the range is based
upon an assumption that other feed prices would not track the price of
corn. Alternatively, corn growers would see a loss of revenues of
roughly $5.8 billion if feed costs track the price of corn. Ethanol
producers, faced with a corresponding loss in demand of roughly 950
million gallons of ethanol in the scenario, would see a decrease in
revenues and co-product sales of roughly $2.9 billion. This finding
with regards to corn prices and feed price impacts is consistent with
our projection of the impact of the RFS program in the binding case. We
project that, in cases where the conventional portion of the RFS
requirements are binding, a waiver would reduce corn prices by $0.58/
bushel and feed prices by approximately $3.6 billion nationwide.
However, as stated above, we only project this outcome in 11 percent of
cases, which are premised on the unrealistic view that gasoline prices
and corn yields in 2012/2013 both fall significantly below their
current DOE and USDA projections. Edgeworth Economics' projections are
plausible only to the extent this would occur. Further, because the
Edgeworth study is premised upon an averaging of the Babcock and
Purdue/Farm Foundation results, it shares the limitations of those
findings as well.
    Cardno-ENTRIX evaluated two scenarios under a waiver: a ``low''
scenario in which ethanol production in 2013 is reduced by 500 million
gallons, or 3.7 percent below 2012 levels, and a ``high'' scenario in
which ethanol production in 2013 is reduced 1,425 million gallons or
10.5 percent from 2012 levels. In both scenarios, biodiesel production
is reduced by 500 million gallons, or 50 percent below 2012 levels of
production. These scenarios are patterned off of the results of recent
analyses of RFS waiver impacts by Babcock-Iowa State University and
Purdue/Farm Foundation. The reduction in biodiesel volumes makes the
scenarios somewhat different. As did Purdue/Farm Foundation, Cardno-
ENTRIX assumes that sufficient economic refiner flexibility exists to
reach the volume of ethanol production assumed in each of their
scenarios.
    In the ``low scenario'', average corn prices fall by $0.46/bushel
and average soybean prices fall by $0.74/bushel. In the ``high
scenario'', average corn prices fall by $0.48/bushel and average
soybean prices fall by $0.96/bushel. As a response of demand shifts in
the corn market (i.e., less ethanol, more feed and exports), corn price
declines are roughly similar in the ``low'' and the ``high'' scenarios.
The ``low'' scenario is comparable to our projected outcome if the RFS
program is binding. In that case, we project that ethanol production
would decrease by approximately 414 million gallons, with corn prices
decreasing $0.58/bushel. Much of the difference is attributable to
differences in key assumptions. The Babcock paper from which Cardno-
ENTRIX drew this estimate utilized earlier WASDE estimates and also
used gasoline futures prices instead of STEO estimates. Inputs to that
analysis also vary in terms of the economic value of ethanol to
refiners, and under what circumstances refiners would shift away from
ethanol. As discussed elsewhere in this decision in detail, our
analysis with respect to the value of ethanol to refiners given current
conditions led us to results that differ.
    In both scenarios, increases in DDGS and soybean meal prices offset
declines in corn and soybean prices with

relatively minimal impacts on net feed ration costs. For example, in
the ``low scenario'', there is a slight decrease in net feed costs for
beef due to the relatively high share of feed costs for feeder cattle
accounted for by corn grain. However, net feed costs for dairy cattle
increase by more than four percent and net feed costs for swine,
broilers and layers increase by less than one percent. Part of the
reason for the livestock outcomes in this analysis is due to scenario
design. A waiver that reduces biodiesel usage results in less soy meal
production and increases feedstock costs. The reduction in soy meal
offsets the livestock impacts of a waiver that only influences ethanol
production.
    Studies performed by FarmEcon LLC attempted to quantify the
potential impacts of a waiver on poultry, dairy and hog producers in
North Carolina and Virginia. Both studies cite the Purdue/Farm
Foundation study as their source for the key analytical input of
commodity prices; other commenters cited the Purdue/Farm Foundation
study as well when presenting quantitative impacts.\74\ In one of the
studies, FarmEcon LLC uses a decrease in average corn prices of $1.14/
bushel from the Purdue/Farm Foundation large waiver scenario to look at
feed costs impacts for the dairy, poultry and hog producers in North
Carolina. The corn price changes estimated by Purdue/Farm Foundation
are higher than the change in corn prices we anticipate to result from
a waiver for reasons discussed above. Using a larger change in corn
prices, FarmEcon LLC estimates larger feed market impacts than we
anticipate.
---------------------------------------------------------------------------

    \74\ Quantitative analysis presented in comments by the National
Chicken Council, for example, uses estimates from an updated version
of the Purdue/Farm Foundation study, EPA-HQ-OAR-2012-0632-1994. At
the request of the National Chicken Council, the authors of this
study applied September WASDE data to the same methodology,
providing new results. The National Chicken Council refers to a
projected change in corn prices of $2.00/bushel as a result of a
waiver. The authors of this study projected that change assuming
that ethanol production dropped from 13.8 billion gallons without a
waiver to 7.75 billion gallons with a waiver. As we detail in our
discussion of Elam, we do not agree with the estimate that 13.8
billion gallons of ethanol would be produced in 2013 with RFS
requirements in place. Further, as we detail in our discussion of
the Purdue/Farm Foundation study, the assumption that ethanol
consumption by the refining sector could fall by roughly 6 billion
gallons within the space of one year does not reflect our assessment
of limits on refiner flexibility.
---------------------------------------------------------------------------

    We also note that this analysis does not consider the effects of a
waiver on distillers grains prices. To the extent that a waiver would
reduce corn ethanol production (as it would to at least some extent in
all three scenarios examined above), it would also reduce the supply of
distillers grains. This increased scarcity of distillers grains would
likely increase their price; at best prices would remain stable. To the
extent that a waiver would lead to increased distillers grain prices,
the projected reductions in feed costs detailed above would be
mitigated.
    Other studies submitted by commenters included work done by Babcock
examining potential long-term impacts of the RFS program on the swine
industry.\75\ We do not respond to this study here as it is analyzing a
set of issues outside the scope of the current decision. The DEFRA
analysis does not contain sufficient detail with respect to methodology
or analytical parameters to enable an evaluation of its results in the
context of the current waiver requests. For example, DEFRA assess
illustrative scenarios where a price spike is simulated by reducing the
U.S. corn area harvested by 40 percent while maintaining the U.S.
renewable mandate and ethanol blenders' subsidy in 2011. Various
scenarios are simulated which waive an increasing share of the U.S.
renewable fuel requirement, all while maintaining the ethanol blenders'
subsidy. DEFRA finds that the larger the share of the mandate waived,
the larger the price increases that are offset. The DEFRA study does
not analyze impacts of a potential waiver under current conditions
(e.g., with projected corn yields for the 2012/13 corn marketing year,
elimination of the blenders' subsidy), and instead examines more
generic consequences of a waiver for average corn prices.
---------------------------------------------------------------------------

    \75\ ``Iowa State Analysis for 2015-2020/Analysis of Ethanol and
Corn Market and the Impact on the Swine Industry,'' submitted in
comments by the National Pork Producers Council, EPA-HQ-OAR-2012-
0632-2209.
---------------------------------------------------------------------------

5. Summary of the Technical Analysis

    For the 2012/2013 corn marketing year, our analysis shows that it
is very likely that the RFS volume requirements will have no impact on
ethanol production volumes in the relevant time frame, and therefore no
impact on corn, food, or fuel prices. In addition the body of the
evidence also indicates that even in the unlikely event that the RFS
requirements would have an impact on the corn and other markets during
the 2012-2013 timeframe, it would have at most a limited impact on the
food, feed, and fuel markets. The nature and magnitude of these
projected impacts, which are not likely to occur, would not be
characterized as severe. After reviewing the analysis and information
submitted by commenters, including that discussed above, EPA continues
to believe that the results of its modeling are the most reliable
indicator of the likelihood that implementation of the RFS volume
requirements will have an impact on the economy, and in the unlikely
case that it would have an impact, the nature and magnitude of such
impact.

6. Waiver Requests Related to Implementation of the RFS Biomass-Based
Diesel and Advanced Biofuel Volume Requirements

    EPA received several comments addressing issues related to a waiver
of the biomass-based diesel (BBD) volume requirements. In general, the
comments provided relatively little information or analysis on the
relevant issues.
    While few analyses and comments examined the issue of a BBD waiver,
those that did focused on the impact on livestock and feed prices. The
key price impact here is that of soybean meal, since this is the
primary soy product fed to livestock. We are aware of two quantitative
studies that projected price impacts on soybeans and soybean meal as a
result of a possible BBD waiver, Babcock-Iowa State and Cardno-
ENTRIX.\76\ Babcock projects that a waiver of the BBD requirements
might reduce soybean prices by $0.61 per bushel or about 3.5 percent
(assuming that rollover RINs are available), but would also increase
soybean meal prices by $22.00 per ton or about 4.2 percent. Cardno-
ENTRIX finds, under an assumed 500 million gallon decrease in the BBD
requirements, that soybean prices would decrease by $0.74 per bushel or
4.5 percent, while soybean meal prices would increase by $32.96 per ton
or about 6.7 percent. Because most livestock are fed soybean meal, not
whole soybeans, these projections would mean that a waiver of the BBD
volumes would very likely increase feed costs.\77\ This would mean that
waiving the BBD requirements would likely exacerbate the impacts that
the drought has had on feed prices. It is likely that waiving any
portion of the BBD requirements would cause more economic harm than it
would alleviate in food and feed markets. Given this,

and in light of the fact that the few commenters who asked us to
consider a biodiesel waiver focused on the impacts on livestock costs,
we do not believe that an EPA analysis similar to our examination of
corn ethanol is merited. In addition, EPA concludes that the evidence
does not support a determination that implementation of the RFS BBD
volume requirements would severely harm the economy and a waiver would
therefore not be appropriate.
---------------------------------------------------------------------------

    \76\ Most of the studies examined in this determination,
including those by Purdue/Farm Foundation, Irwin and Good, and
Edgeworth Economics (all discussed elsewhere in this notice), focus
only on the impacts of corn ethanol. FAPRI-Missouri provides
estimated impacts of a biodiesel waiver on soybean prices, but does
not provide estimated impacts for key soybean products (i.e.,
soybean meal). For this reason, this paper's estimates for soybeans
are of limited usefulness in the context of feed costs.
    \77\ EPA received comment on this topic from various soybean-
related parties, including, for example, the Illinois Soybean
Association and Minnesota Soybean Processors (CITE).
---------------------------------------------------------------------------

    Similarly, we have not conducted a technical analysis of the
potential impacts of waiving the advanced renewable fuel standard,
since a majority of the advanced standard is expected to be met with
biomass-based diesel in the 2012/2013 corn marketing year. Finally, we
have not analyzed the impacts of waiving the cellulosic renewable fuel
standard in 2012/2013, since we did not receive any specific
information or rationale concerning a possible justification for
waiving the cellulosic volumes. In addition, the cellulosic volume
requirement for 2013 is likely to be relatively small and production
volumes unlikely to be affected by the drought due to their sources of
feedstock.

VI. Other Issues

    EPA received comment on several areas of concern in addition to the
economic impact of implementation of the RFS volume requirements.
Comments addressed, among other things, overall U.S. policy on biofuels
and the RFS; the environmental impacts of renewable fuels in general
and the RFS program in particular; the impact of granting a waiver on
the future of ethanol production in the U.S.; the characteristics,
favorable or otherwise, of ethanol as a transportation fuel; and EPA's
interpretation of section 211(o)(7) of the Act. Although this section
summarizes and provides general responses to some of the more the more
frequently raised comments that are unrelated to the economic impact of
implementing the RFS, EPA notes that these issues generally were not
relevant to EPA's consideration of the current waiver request. While
EPA has broad discretion to consider such issues in determining whether
or not to grant a waiver if it finds that implementation of the RFS
would severely harm the economy of a State, region or the U.S., these
issues are not relevant to EPA's decision where, as here, EPA is
denying the waiver requests because the evidence and information does
not support a determination that the statutory criteria for granting a
waiver are satisfied.

1. Impacts on Corn Prices From Increasing Renewable Fuel Production

    EPA received many comments discussing the impact of increasing
renewable fuel production over time on crop and feed prices, and on the
economic consequences of increasing prices on various sectors,
including the livestock, poultry, dairy, various food-related
industries, and segments of the population.\78\ Multiple commenters
argued that the rise of corn prices over the past several years has
coincided with and is in substantial part a result of the increasing
renewable fuel volumes required under the RFS program. Commenters state
that the consequences of this dynamic include tighter global corn
supplies, a more volatile commodity market, and higher costs for
various sectors of the economy as the prices of a key input, corn, have
risen. A number of the requesting States and many commenters state that
higher corn prices caused in part by increased demand from the RFS
program have had significant negative effects on the livestock,
poultry, and dairy industries due to the rising costs of feed. Other
commenters focus on the link between higher prices for corn or other
food commodities and increased prices of food for consumers. Some of
these comments cite analysis conducted by various individuals or
organizations estimating the portion of the increase in corn prices
over a period of time that is attributable to increased renewable fuel
use, or the impact of rising corn prices on consumer food items.
---------------------------------------------------------------------------

    \78\ Examples include petitions and/or comments submitted by
various requesting States and by individuals and organizations
associated with the livestock, poultry, and dairy industries.
---------------------------------------------------------------------------

    EPA acknowledges the linkages between corn prices, feed prices,
costs to the livestock, poultry, and dairy industries, as well as
impacts on food prices; the analysis presented above explicitly
examines these connections. At the same time, and as many commenters
also point out, the market price of corn is influenced by a variety of
factors, including among other things macroeconomic factors like oil
prices, international demand for coarse grains, crop production in
different corn-growing countries, fertilizer costs, and weather
conditions that affect crop production levels. As many of the
requesting State letters point out, and as we discuss in the Executive
Summary, this year's severe drought has had a significant impact on the
recent increase in corn prices.\79\
---------------------------------------------------------------------------

    \79\ See, for example, August 13, 2012 letter from the Governor
of Arkansas, EPA-HQ-OAR-2012-002. ``Virtually all of Arkansas is
suffering from severe, extreme, or exceptional drought conditions.
The declining outlook for this year's corn crop and accelerating
prices for corn and other grains are having a severe economic impact
on the State.''
---------------------------------------------------------------------------

    As mentioned above we fully recognize the toll this year's drought
has taken on multiple sectors of the economy, and we have reviewed
comments submitted to us in detail. While we generally agree that the
issues raised by commenters are important considerations, as discussed
previously, the issue before EPA is a narrow one--whether
implementation of the RFS volume requirements over the time period at
issue would severely harm the economy. The historical impacts of
overall production and use of biofuels in the U.S. is not the relevant
issue for purposes of determining whether implementing the RFS would
severely harm the economy of a State, region or the U.S. over the time
period of concern.

2. Overall U.S. Policy on Renewable Fuels

    EPA also received comments from various individuals and
organizations critical of the broader RFS program and policies that
promote renewable fuels in general. Some commenters raise the potential
negative environmental consequences of renewable fuels, including
impacts on wildlife habitat due to renewable fuel policy, and the
potential for increased greenhouse gas emissions from land use changes
connected to renewable fuel policy.\80\ Others focus on the impacts
that the RFS and other renewable fuel policies can have on
international commodity markets, effects of price changes in developing
countries, volatility in agricultural prices, and effects on domestic
consumers, and argue that a waiver of RFS requirements would help to
begin addressing such negative impacts. Some commenters either cited or
submitted a study by Dr. Thomas Elam of FarmEcon LLC presenting a
fairly comprehensive assessment of the RFS program, its impact on the
agricultural sector, fuel markets, and global commodity markets, and
proposals for statutory modifications.\81\
---------------------------------------------------------------------------

    \80\ See for example comment submitted by Bullock et al., EPA-
HQ-OAR-2012-0635-1707.
    \81\ See Dr. Thomas Elam, FarmEcon LLC, ``The RFS, Fuel and Food
Prices, and the Need for Statutory Flexibility,'' July 16, 2012,
submitted with comments from the National Chicken Council, EPA-HQ-
OAR-2012-0632-1994.
---------------------------------------------------------------------------

    EPA considers these important topics and has reviewed such comments
in detail. However, the question before us is fairly narrow. EPA
received requests for a waiver under a specific provision of law and
our decision in response to those requests is necessarily based on our
authority under that provision. EPA

has no authority to grant the waiver requests under this provision
unless it determines that implementation of the RFS volume requirements
would severely harm the economy of a State, region, or the United
States. The evidence before EPA does not support such a determination,
and EPA therefore is denying the waiver requests. With respect to the
environmental impacts of increased renewable fuel use, the waiver
requests are not based on a claim of severe harm to the environment.
Outside the context of a waiver, EPA is required to address
environmental concerns in various ways, including through analysis of
lifecycle greenhouse gas emissions associated with different renewable
fuels and fuel pathways. EPA's lifecycle analysis of such emissions is
discussed at length in our March 26, 2010 final RFS rulemaking (75 FR
14670). A separate provision of EISA 2007 (the section 204 report to
Congress) requires EPA to assess other potential impacts of biofuel
use.\82\ EPA also considers those kinds of factors when setting
national volume requirements for the years not specified by Congress,
under section 211(o)(2)(B)(ii).
---------------------------------------------------------------------------

    \82\ The first triennial Report to Congress is available at
http://oaspub.epa.gov/eims/eimscomm.getfile?p_download_id=506091.
---------------------------------------------------------------------------

3. RFS Programmatic Issues

    Comments submitted by organizations representing the oil refining
sector suggested that either eliminating or increasing the 20 percent
cap on previous-year RINs that can be used for compliance under Sec.
80.1427(a)(5) would increase the flexibility available to obligated
parties in the event of a market disruption.\83\ As mentioned above,
EPA described its rationale for setting the cap at 20 percent in the
May 1, 2007 final RFS rulemaking.\84\ The cap is a reasoned way to
implement the statutory requirements that credits in the RFS program
have a duration of only 12 months. We continue to believe that the 20
percent cap strikes an appropriate balance between allowing flexibility
to address market disruptions while providing biofuel producers with a
degree of certainty with respect to demand. Therefore, EPA is not
considering modifying the cap level at this time.
---------------------------------------------------------------------------

    \83\ See for example, comments submitted by the American
Petroleum Institute, EPA-HQ-OAR-2012-0632-2240.
    \84\ 72 FR at 23934-5.
---------------------------------------------------------------------------

4. Characteristics of Ethanol as a Transportation Fuel

    EPA received multiple comments describing what commenters view as
unfavorable characteristics of ethanol as a transportation fuel; most
of these comments focused on either ethanol blended into gasoline at
the 10 percent or 15 percent level (E10 or E15). Commenters discussed
the lower energy density of ethanol relative to gasoline and concerns
with the use of E15 in certain engine types. While EPA appreciates the
importance of such topics, they are beyond the scope of this
determination and we do not address them here.

5. The Future of the Renewable Fuel Industry

    Many commenters raised concerns regarding the impact that granting
a waiver could have on the renewable fuel industry and the future of
renewable fuel production. Such commenters, especially those associated
with the renewable fuel sector, pointed out that granting a waiver
would increase uncertainty in the marketplace, reduce investment, and
hinder progress towards the policy goals of EISA 2007. EPA also
received numerous comments related to the potential negative economic
impacts of a waiver on renewable fuel producers and various related
supporting industries, including impacts on jobs. EPA recognizes that
were a waiver to be granted, the impacts would not be constrained to
those industries that utilize corn as a feed input (e.g., livestock or
dairy sectors), and that impacts would also affect other sectors of the
economy, including in the agriculture and renewable fuel production
sectors. EPA has reviewed comments on this topic and will continue to
monitor the status of the U.S. biofuels industry, but in light of
today's decision does not address these comments in detail here.

6. The Ethanol ``Blendwall''

    Comments from oil refiners and associated trade organizations, as
well as others, discuss potential impacts to fuel market dynamics as
the level of ethanol in blended gasoline approaches the ``E10
blendwall.'' \85\ The term blendwall generally refers to the market
based limits on the volume of ethanol in gasoline, as ethanol-gasoline
blends greater than E10 or E15 (depending on the model year of the
vehicle) may only be marketed to flexible fuel vehicles. Commenters
note that volumes of ethanol required by the RFS in the near future
exceed the volume that can be consumed as E10. Commenters state that
once ethanol in gasoline hits this E10 saturation point, blending
additional ethanol into gasoline will not be a viable strategy to
comply with RFS-required volumes.
---------------------------------------------------------------------------

    \85\ See for example comments submitted by the American Fuel and
Petrochemical Manufacturing Association, EPA-HQ-OAR-2012-0632-1939.
---------------------------------------------------------------------------

    In their letters requesting an RFS waiver, the requesting States do
not focus on issues that might be posed by the blendwall, though some
commenters in the livestock and poultry industry raise this topic as an
issue of concern. In addition, while some commenters pointed to
analysis related to blendwall impacts, it was not a focus of the
majority of comments, and the amount of data and analysis submitted on
the blendwall, its impacts on the overall fuel market, and the
relationship between a waiver and blendwall impacts in different years
was relatively small. The blendwall issue is not relevant to the
analysis undertaken as part of this determination, as EPA's technical
analysis indicates that for the 2012/2013 corn year, in light of the
volume requirements in RFS and the amount of rollover RINs, that the
market is expected to cause production of more ethanol than is needed
to comply with the RFS volume requirements. However we believe it may
be instructive to discuss the general topic briefly here.
    In establishing the RFS program, Congress created a framework to
increase the amount of renewable fuel used in the domestic
transportation sector over time. It gradually increases from 4.0
billion gallons in 2006 to 36.0 billion gallons in 2022. Congress
charged EPA with implementation of the program, and directed the Agency
to assign the obligation to use renewable fuels to ``refineries,
blenders, distributors and importers as appropriate'' to ensure that
the annual national statutory volumes were met. EPA subsequently
promulgated the implementing regulations for the RFS program first in
2007 in response to the Energy Policy Act of 2005 and then again in
2010 in response to the Energy Independence and Security Act. Under
these regulations refiners and importers are required to ensure that
the volumes of renewable fuel required under the Act are actually
consumed.
    The RFS program establishes volume requirements for each obligated
party, but it is neutral with respect to the type or form of renewable
fuel used to meet the volume requirements, as long as the fuels are
used to replace or reduce the quantity of fossil fuel present in a
transportation fuel, heating oil or jet fuel; meet the required life-
cycle greenhouse gas (GHG) performance standards; and are made from
qualifying renewable biomass.
    Ethanol has been the dominant domestic renewable fuel for several

years, and during development of the law and regulations stakeholders
in the fuel sector reasonably expected that ethanol would play a
significant role in fulfilling the RFS volume requirements. As pointed
out by commenters, E10 is approaching the point at which it saturates
the gasoline market. As a result, if obligated parties choose to
achieve their required RFS volumes using ethanol they should work with
their partners in the vehicle and fuel market to overcome any market
limitations on increasing the volume of ethanol that is used.
Stakeholders in the refining sector have been aware of the E10
blendwall since passage of EISA in December of 2007.
    As the market has approached the E10 blendwall, the ethanol
industry has worked to support the introduction of E15 into the market,
and domestic auto manufacturers have increased production of vehicles
capable of running on even higher ethanol blends. Over ten million
flex-fuel vehicles (FFVs) are now in the existing fleet. FFVs currently
consume E85 only about 0.4% of the time, but were they to be regularly
fueled on E85, such vehicles would be capable of consuming billions of
additional gallons of ethanol. The affected industries have had and
continue to have the ability to achieve widespread adoption of E85
through working with partners in the retail and terminal infrastructure
sectors to increase the number of stations that offer E85 or other
intermediate ethanol blends and improve the pricing structure relative
to E10.\86\ As noted above, however, other fuel options are available
to meet RFS requirements.
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    \86\ The number of retail service stations that offer E85 has
grown at a rate of only 350 stations per year since 2007. As of
today, the total number of retail stations offering E85 is only
about 3000, so that only one out of every 50 retail fuel stations
offers E85.
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7. Legal Interpretation of 211(o)(7)

(a) Implementation of the RFS Itself Must Severely Harm the Economy
    The statute authorizes a waiver where ``implementation of the
requirement would severely harm the economy.'' In the 2008 waiver
determination, EPA concluded the straightforward meaning of this
provision is that implementation of the RFS program itself must be the
cause of the severe harm. We found that the language provided by
Congress does not support the interpretation that EPA would be
authorized to grant a waiver if it found that implementation of the
program would significantly contribute to severe harm. EPA noted
several instances in section 211 and other sections of the Clean Air
Act where Congress authorized EPA action based on the contribution made
by a factor or activity, and worded the statute to clearly indicate
this intention. We cited as an example section 211(c)(1) of the Act
which authorizes EPA to control or prohibit a fuel or fuel additive
where it ``causes or contributes'' to air or water pollution that may
reasonably be anticipated to endanger public health or welfare. EPA
also cited to various waiver provisions where Congress clearly used
language indicating that a waiver could be based on a determination
that there is a contribution to an adverse result or a similar lesser
degree of casual link to the adverse result. Section 211(f)(4), for
example, allows EPA to waive a certain prohibition on fuels and fuel
additives upon a determination that they will not ``cause or
contribute'' to a specified harm. Other examples are presented in the
2008 waiver determination.
    In response to the August 30, 2012 Notice, one commenter argued
that the concept of ``cause or contribute to'' arises in the Clean Air
Act under a set of contexts that pertain to ``public health,
environmental quality, safety,'' but do not relate to the concept of
economic harm. In interpreting the language of 211(o)(7) by examining
other instances where Congress utilizes the concept of contribution
under section 211, commenters assert, EPA unnecessarily limited itself
to an overly stringent reading of the RFS waiver provision.\87\
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    \87\ American Petroleum Institute, EPA-HQ-OAR-2012-0632-2240
---------------------------------------------------------------------------

    EPA disagrees with this argument. Had Congress intended to
authorize EPA to grant a waiver where RFS implementation is merely a
contributing factor to severe economic harm, it could clearly have done
so by using statutory language similar to that found in the statutory
provisions cited by the commenter.
    Another commenter argued that EPA's interpretation renders the
provision impossible to meet and essentially prejudges the issue. They
noted that implementation of the RFS requirements must always occur
within the context of an existing economy and fact situation, so that
it is inappropriate to interpret the waiver provision as requiring that
implementation of the RFS alone would cause severe economic harm. They
state that the statute does not require the Administrator to ignore the
worst drought in 50 years, its effects on corn stocks, and the price
effects of the interaction of the RFS with the drought-induced supply
shock. The commenter misinterprets EPA's position. EPA agrees that
implementation of the RFS must necessarily occur within the context of
existing market conditions, and that it is necessary and appropriate
for EPA to consider the effect of RFS implementation in the context of
those existing conditions. That is why for today's determination EPA
has modeled the impact of RFS implementation in the current economic
environment, including the context of the current drought and its
impacts on corn yields and corn prices. Nor does EPA believe that its
interpretation renders the provision impossible to meet. In Section V
we discuss a number of key parameters and inputs used in our modeled
analysis; these include availability of rollover RINs, gasoline prices,
and corn yields, among others. Changes in one or several of these
variables could lead to analytical results that could provide support
for a finding that implementation of the RFS is severely harming the
economy--but our analysis does not support such a finding for the time
period and scenario analyzed here.
(b) There Must Be a Generally High Degree of Confidence That There Will
Be Severe Harm as a Result of the Implementation of RFS
    The waiver provision indicates that EPA must find that
implementation of the RFS ``would'' severely harm the economy. We
previously interpreted this as indicating that there must be a
generally high degree of confidence that severe harm would occur from
implementation of the RFS, and we continue to believe this
interpretation is appropriate. In the 2008 waiver determination we
noted that Congress specifically provided for a lesser degree of
confidence in a related waiver provision, section 211(o)(8). That
provision applies for just the first year of the RFS program, and
provides for a waiver of the 2006 requirements based on a study by the
Secretary of Energy of whether the program ``will likely result in
significant adverse impacts on consumers in 2006.'' (Emphasis
supplied). The term ``likely'' generally means that something is at
least probable, and EPA believes that the term ``would'' in section
211(o)(7)(A) means Congress intended to require a greater degree of
confidence under the waiver provision at issue here.
    We also noted in 2008 EPA's belief that generally requiring a high
degree of confidence that implementation of the RFS would severely harm
an economy would appropriately implement Congress' intent for yearly
growth in the

use of renewable fuels, evidenced by the 2005 and 2007 requirements for
such growth. In addition, it would limit waivers to circumstances where
a waiver would be expected to provide effective relief from harm. If
there is generally high confidence that implementation of the RFS
program would cause harm, then a waiver should provide effective relief
from that harm. However in situations where there is not such a high
degree of confidence, a waiver might be ineffectual and unnecessarily
disrupt the expected growth in use of renewable fuels.
    In our prior Texas waiver determination we found support for our
interpretation of this waiver provision in an analogous approach taken
by EPA in applying former section 211(k)(2)(B), the provision for
waiver of the oxygen content requirement for RFG. In that provision,
Congress provided that EPA ``may'' waive the oxygen content requirement
upon a determination that compliance with this requirement ``would''
prevent or interfere with attainment of a NAAQS. EPA interpreted this
as calling for the waiver applicant to ``clearly demonstrate''
interference before a waiver would be granted. This interpretation was
upheld in Davis v. EPA, 348 F.3d 772, 779-780 (9th Cir. 2003).
    In response to the August 30, 2012 Notice, one commenter argued
that EPA erred in finding support for its interpretation of the term
``would'' in Section 211(o)(7) by reference to the less stringent
``will likely result'' statutory test set forth in 211(o)(8) for a
waiver of the renewable fuel requirements in 2006. The commenter
suggests that the fact situation in 2006 was different in that it was
the first year of the RFS program, and that relatively smaller
renewable fuel volumes were involved. While EPA agrees that the fact
situation in 2006 was different than in subsequent years of RFS
implementation, that fact does not render EPA's analysis of the
different statutory terms unreasonable. No doubt because the fact
situation was different in 2006 than in subsequent years of RFS
implementation, Congress established a different, and less stringent,
test to justify an RFS waiver in that year than in subsequent years. It
is entirely reasonable for EPA to conclude that Congress intended a
higher degree of certainty of harm in 211(o)(7) than in 211(o)(8) in
light of the different statutory terms used in those sections.
Therefore, EPA believes the ``would severely harm'' test in 211(o)7)
requires a higher degree of certainty of harm than the ``will likely
result'' test in 211(o)(8).
(c) ``Severely Harm'' Indicates That Congress Set a High Threshold for
Grant of a Waiver
    In 2008, EPA discussed the level or threshold of harm necessary to
satisfy the ``severely harm'' phrase found in section 211(o)(7). EPA
continues to agree with the interpretation from the 2008 waiver
determination, where we stated that while the statute does not define
the term ``severely harm,'' the straightforward meaning of this phrase
indicates that Congress set a high threshold for issuance of a waiver.
In the 2008 determination we discussed our rationale for this reading,
pointing to the difference between the criteria for a waiver under
section 211(o)(7)(A) and the criteria for a waiver during the first
year of the RFS program. In section 211(o)(8)(A) Congress provided for
a waiver based on an assessment of whether implementation of the RFS in
2006 would result in ``significant adverse impacts'' on consumers. A
waiver under section 211(o)(7)(A), however, requires that
implementation ``severely harm'' the economy, which is clearly a much
higher threshold than ``significant adverse impacts.'' We also
considered the use of the term ``severe'' in CAA section 181(a). Ozone
nonattainment areas are classified according to their degree of
impairment, along a continuum of marginal, moderate, serious, severe or
extreme ozone nonattainment areas. Thus, in section 181, ``severe''
indicates a level of harm that is greater than marginal, moderate, or
serious, though less than extreme. We previously stated our belief that
the term ``severe'' should be similarly interpreted for purposes of
section 211(o)(7)(A), as indicating a point that is quite far along a
continuum of harm, though short of extreme. In response to the August
30, 2012 Notice, one commenter, addressing this comparison, wrote,
``EPA suggested in the Texas waiver decision that it needed to
interpret `severe' within CAA section 211 in the same manner as CAA
section 181(a). EPA is under no such mandate.'' \88\ EPA agrees that we
are under no such mandate, and disagrees with the commenter's
characterization of our decision in 2008. EPA is not required to
interpret the term ``severe'' in section 211in the same manner as
section 181(a), but as we wrote in the 2008 determination, it is
``instructive'' to do so. EPA continues to believe this is the case.
---------------------------------------------------------------------------

    \88\ National Pork Producers Council comments, EPA-HQ-OAR-2012-
0632-2209.
---------------------------------------------------------------------------

    As in 2008, and after reviewing comments submitted this year, EPA
finds that we do not need to interpret this provision in any greater
detail for purposes of acting on any of the waiver requests, as the
circumstances in this case do not demonstrate the kind of harm from RFS
implementation that would be characterized as severe. In addition, as
described in section V, EPA has determined that it is highly likely
that implementation of the RFS in 2012 and 2013 will have no impact on
the use of renewable fuel in the United States. Thus, implementation of
the RFS could not be seen as severely harming the economy, regardless
of EPA's interpretation of the term.
(d) Harm to the Economy
    Under EPA's prior Texas waiver determination EPA considered the
meaning of the term ``economy'' in section 211(o)(7)(A)(2). Although
Texas had argued that the term should be interpreted such that a
showing of severe harm to one sector of the economy, e.g., the
livestock industry, is sufficient under the statute, others argued that
there must be a showing of severe harm to the entire economy of a
State, region or the United States, including all sectors. EPA stated
its belief that it would be unreasonable to base a waiver determination
solely on consideration of impacts of the RFS program to one sector of
an economy, without also considering the impacts of the RFS program on
other sectors of the economy or on other kinds of impact. It is
possible that one sector of the economy could be severely harmed, and
another greatly benefited from the RFS program; or the sector that is
harmed may make up a quite small part of the overall economy. EPA
stated its belief that in the context of any RFS waiver request we
should responsibly review and analyze the economic information that is
reasonably available regarding the full impacts of the RFS program and
a possible waiver, including detrimental and beneficial impacts, before
determining that a waiver of the program is warranted. In addition, we
examined the language in the statute providing that EPA ``may'' waive
the RFS volume requirement after finding that implementation of the RFS
program would severely harm the economy. As such, we determined that a
broad consideration of economic and other impacts could be undertaken
whether or not EPA adopted the more limited interpretation of the term
``economy'' advanced by Texas. For example, if EPA examined the full
impacts on an economy, EPA would determine whether RFS implementation
would severely harm the overall economy of a State, region, or the U.S.
However, if

EPA adopted the more limited interpretation, and then found severe harm
to a sector of the economy, EPA would still evaluate the overall
impacts on the economy and other factors before exercising its
discretion under the ``may'' clause to grant or deny the waiver
request. Some commenters argued in response to the August 30 notice
that EPA's interpretation in the 2008 Texas waiver decision was
incorrect, because nothing in the statute allows EPA to broadly
consider possible economic benefits as well as harm to various sectors
of the economy. The commenter failed to acknowledge that EPA is not
required to issue a waiver when severe economic harm to a state, region
or the United States is demonstrated. The statute provides that EPA
``may'' do so in that situation. EPA continues to believe that in
exercising its discretion under the statute to grant or deny a waiver
request, it would be reasonable for EPA to consider all impacts
associated with RFS implementation. In its Texas waiver determination
EPA found that it did not need to resolve the issue of whether a waiver
could be granted based solely on a demonstration of harm to one sector
of the economy, since the circumstances in that case did not warrant a
waiver under either interpretation. Similarly, despite the comments EPA
received on this interpretative issue within the current waiver
requests, we find that EPA does not need to resolve this issue of
interpretation since the circumstances in this case do not warrant a
waiver under either interpretation.

VII. Decision

    EPA recognizes that severe drought has taken a large toll on many
States and sectors of the economy, and further acknowledges that many
parties, both those supporting a waiver and those opposing a waiver,
have raised issues of great concern to them and to others in the nation
concerning the use of biofuels. However the issue before the Agency in
this case is a much more limited one, as described below. Based on a
thorough review of the record in this case, and applying the evidence
to the statutory criteria, EPA finds that the evidence does not support
granting a waiver.
    EPA is authorized to grant a waiver request if EPA determines that
implementation of the RFS requirements would severely harm the economy
of a State, region, or the United States. As discussed above, this
calls for a determination that implementation of the RFS itself would
severely harm the economy; it is not enough that implementation would
contribute to such harm. Today's determination has two basic parts. The
first part addresses whether there is a generally high degree of
confidence that harm would occur from implementation of the RFS. The
second part considers whether such harm, if it were to occur, is
``severe'', indicating a high threshold for the nature and degree of
harm that would support issuance of a waiver, a point that is quite far
along a continuum of harm, though short of extreme. Based on a thorough
review of the record in this case, and applying the evidence to the
statutory criteria, EPA finds that the evidence does not support
granting a waiver.
    First, regarding the degree of confidence that implementation of
the RFS program during the time period at issue would harm the economy,
after weighing all of the evidence before it the evidence does not
support a finding that implementation of the RFS would harm the economy
of a State, region, or the United States. All parties agree that any
claimed economic harm would derive from the increased production of
ethanol associated with implementation of the RFS, and any associated
increase in the price of corn. However the weight of the evidence shows
that it is very likely that the RFS volume requirements will have no
impact on ethanol production volumes in the relevant time frame, and
therefore no impact on corn, food, or fuel prices. The ISU modeling
projects that waiving the RFS would have no impact at all on the use of
ethanol in 89% of the scenarios modeled. The availability of rollover
RINs, the beneficial economics of producing ethanol gasoline blends,
the generally low level of flexibility of refiners to shift from
ethanol over a one-year period, and the low price currently in the
market for renewable fuel RINs all support the conclusion that waiving
the RFS program would not be expected to have any effect on the
production of ethanol. In other words, demand for ethanol would remain
high with and without the RFS volume requirements for the time period
at issue. As discussed in section V, the evidence submitted to support
the view that a waiver would have a large effect on ethanol use is less
credible because of concerns about the validity of key assumptions that
underpin those analyses. After considering all of the evidence and
information and weighing it appropriately, EPA believes that it is very
likely that implementation of the RFS volume requirements will have no
impact on ethanol production volumes in the relevant time frame. The
analysis also indicates that it is unlikely that implementation of the
RFS would cause any degree of harm to the economy. Though EPA fully
recognizes the harmful impact to the economy from the 2012 drought, the
evidence before the agency does not support a finding that
implementation of the RFS would likely or even probably cause harm to
the economy over the 2012/2013 time period and certainly the evidence
does not reach the generally high degree of confidence required for
issuance of a waiver under section 211(o)(7)(A).
    Second, the Agency examined the evidence to evaluate the potential
impact of implementation of the RFS program on corn prices and the
impacts of such corn prices on various sectors of the economy and the
overall economy, both within the requesting States and for the entire
United States. In the ISU modeling, a range of scenarios were modeled,
with the model projecting ethanol use, corn price and fuel price. The
modeling indicates that for 89% of the scenarios implementation of the
RFS volume requirements would have no impact on ethanol use or corn
price, with only 11% of the scenarios indicating a change in ethanol
use and a corresponding change in corn price. EPA determined that the
average change in corn price over all of the scenarios was $0.07 per
bushel of corn. The average change in corn price over the 11% of
scenarios where a waiver would have an effect was $0.58 per bushel of
corn. As discussed in section V, a price change in corn of this
magnitude would have only a moderate impact on livestock costs and food
prices. It would also be accompanied by a small change in fuel costs.
For the reasons discussed above, EPA believes the weight of the
evidence supports the view that it is highly likely there will be no
impact on ethanol use or corn prices from implementation of the RFS
program over the time period at issue, and if an impact were to occur,
it would likely be on average $0.58 per bushel of corn. EPA believes
this range of potential price increases for corn, even without
considering the accompanying impact on fuel prices, would not support a
determination of severe harm to the economy, whether considering the
various livestock industries of the requesting States, livestock
industry of the nation, the economies of the requesting States, or the
economy of the United States. In this case, EPA does not need to
determine exactly what nature or degree of harm would amount to severe
harm, as the evidence in this case clearly does not meet the statutory
criterion of severe harm to an economy.

    In conclusion, EPA finds that the evidence and information in this
case does not support a determination that implementation of the RFS
requirements during the time period at issue would severely harm the
economy of a State, a region, or the United States.

    Dated: November 16, 2012.
Lisa P. Jackson,
Administrator.
[FR Doc. 2012-28586 Filed 11-26-12; 8:45 am]
BILLING CODE 6560-50-P