[Federal Register Volume 81, Number 104 (Tuesday, May 31, 2016)]
[Proposed Rules]
[Pages 34777-34816]
[FR Doc No: 2016-12369]

Vol. 81

Tuesday,

No. 104

May 31, 2016

Part V

Environmental Protection Agency

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40 CFR Part 80

Renewable Fuel Standard Program: Standards for 2017 and Biomass-Based
Diesel Volume for 2018; Proposed Rule

Federal Register / Vol. 81 , No. 104 / Tuesday, May 31, 2016 /
Proposed Rules

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2016-0004; FRL-9946-90-OAR]
RIN 2060-AS72

Renewable Fuel Standard Program: Standards for 2017 and Biomass-
Based Diesel Volume for 2018

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: Under section 211 of the Clean Air Act, the Environmental
Protection Agency (EPA) is required to set renewable fuel percentage
standards every year. This action proposes the annual percentage
standards for cellulosic biofuel, biomass-based diesel, advanced
biofuel, and total renewable fuel that would apply to all motor vehicle
gasoline and diesel produced or imported in the year 2017. The EPA is
proposing a cellulosic biofuel volume that is below the applicable
volume specified in the Act. Relying on statutory waiver authorities,
the EPA is also proposing to reduce the applicable volumes of advanced
biofuel and total renewable fuel. The proposed standards are expected
to continue driving the market to overcome constraints in renewable
fuel distribution infrastructure, which in turn is expected to lead to
substantial growth over time in the production and use of renewable
fuels. In this action, we are also proposing the applicable volume of
biomass-based diesel for 2018.

DATES: Comments must be received on or before July 11, 2016. EPA will
announce the public hearing date and location for this proposal in a
supplemental Federal Register document.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-HQ-
OAR-2016-0004, at http://www.regulations.gov. Follow the online
instructions for submitting comments. Once submitted, comments cannot
be edited or removed from Regulations.gov. The EPA may publish any
comment received to its public docket. Do not submit electronically any
information you consider to be Confidential Business Information (CBI)
or other information whose disclosure is restricted by statute.
Multimedia submissions (audio, video, etc.) must be accompanied by a
written comment. The written comment is considered the official comment
and should include discussion of all points you wish to make. The EPA
will generally not consider comments or comment contents located
outside of the primary submission (i.e. on the web, cloud, or other
file sharing system). For additional submission methods, the full EPA
public comment policy, information about CBI or multimedia submissions,
and general guidance on making effective comments, please visit http://www2.epa.gov/dockets/commenting-epa-dockets.

FOR FURTHER INFORMATION CONTACT: Julia MacAllister, Office of
Transportation and Air Quality, Assessment and Standards Division,
Environmental Protection Agency, 2000 Traverwood Drive, Ann Arbor, MI
48105; telephone number:<PHONE_NUMBER>; email address:
<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION: Entities potentially affected by this final
rule are those involved with the production, distribution, and sale of
transportation fuels, including gasoline and diesel fuel or renewable
fuels such as ethanol, biodiesel, renewable diesel, and biogas.
Potentially regulated categories include:

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                                                NAICS \1\                     Examples of potentially regulated
                  Category                        Codes       SIC \2\ Codes                entities
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Industry...................................          324110            2911  Petroleum Refineries.
Industry...................................          325193            2869  Ethyl alcohol manufacturing.
Industry...................................          325199            2869  Other basic organic chemical
                                                                              manufacturing.
Industry...................................          424690            5169  Chemical and allied products
                                                                              merchant wholesalers.
Industry...................................          424710            5171  Petroleum bulk stations and
                                                                              terminals.
Industry...................................          424720            5172  Petroleum and petroleum products
                                                                              merchant wholesalers.
Industry...................................          221210            4925  Manufactured gas production and
                                                                              distribution.
Industry...................................          454319            5989  Other fuel dealers.
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\1\ North American Industry Classification System (NAICS).
\2\ Standard Industrial Classification (SIC) system code.

    This table is not intended to be exhaustive, but rather provides a
guide for readers regarding entities likely to be regulated by this
proposed action. This table lists the types of entities that EPA is now
aware could potentially be regulated by this proposed action. Other
types of entities not listed in the table could also be regulated. To
determine whether your entity would be regulated by this proposed
action, you should carefully examine the applicability criteria in 40
CFR part 80. If you have any questions regarding the applicability of
this proposed action to a particular entity, consult the person listed
in the FOR FURTHER INFORMATION CONTACT section.

Outline of This Preamble

I. Executive Summary
    A. Purpose of This Action
    B. Summary of Major Provisions in This Action
    1. Proposed Approach to Setting Volume Requirements
    2. Advanced Biofuel and Total Renewable Fuel
    3. Biomass-Based Diesel
    4. Cellulosic Biofuel
    5. Annual Percentage Standards
    C. Outlook for 2018 and Beyond
II. Advanced Biofuel and Total Renewable Fuel Volumes for 2017
    A. Statutory Authorities for Reducing Volume Targets
    B. Proposed Determination of Inadequate Domestic Supply
    C. Total Renewable Fuel Volume Requirement
    1. Ethanol
    2. Biodiesel and Renewable Diesel
    i. Feedstock Availability
    ii. Biodiesel and Renewable Diesel Production Capacity
    iii. Biodiesel and Renewable Diesel Import Capacity
    iv. Biodiesel and Renewable Diesel Distribution Capacity
    v. Biodiesel and Renewable Diesel Retail Infrastructure Capacity
    vi. Biodiesel and Renewable Diesel Consumption Capacity
    vii. Biodiesel and Renewable Diesel Consumer Response
    viii. Projected Supply of Biodiesel and Renewable Diesel in 2017
    3. Total Renewable Fuel Supply
    D. Advanced Biofuel Volume Requirement
    E. Market Responses to the Proposed Advanced Biofuel and Total
Renewable Fuel Volume Requirements
    F. Impacts of Proposed Standards on Costs
III. Cellulosic Biofuel Volume for 2017
    A. Statutory Requirements
    B. Cellulosic Biofuel Industry Assessment

    1. Potential Domestic Producers
    2. Potential Foreign Sources of Cellulosic Biofuel
    3. Summary of Volume Projections for Individual Companies
    C. Proposed Cellulosic Biofuel Volume for 2017
IV. Biomass-Based Diesel Volume for 2018
    A. Statutory Requirements
    B. Determination of Applicable Volume of Biomass-Based Diesel
    1. BBD Production and Compliance Through 2015
    2. Interaction Between BBD and Advanced Biofuel Standards
    3. Proposed BBD Volume for 2018
    C. Consideration of Statutory Factors for 2018
V. Percentage Standards for 2017
    A. Calculation of Percentage Standards
    B. Small Refineries and Small Refiners
    C. Proposed Standards
VI. Public Participation
    A. How do I submit comments?
    B. How should I submit CBI to the agency?
VII. Statutory and Executive Order Reviews
    A. Executive Order 12866: Regulatory Planning and Review and
Executive Order 13563: Improving Regulation and Regulatory Review
    B. Paperwork Reduction Act (PRA)
    C. Regulatory Flexibility Act (RFA)
    D. Unfunded Mandates Reform Act (UMRA)
    E. Executive Order 13132: Federalism
    F. Executive Order 13175: Consultation and Coordination With
Indian Tribal Governments
    G. Executive Order 13045: Protection of Children From
Environmental Health Risks and Safety Risks
    H. Executive Order 13211: Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
    I. National Technology Transfer and Advancement Act (NTTAA)
    J. Executive Order 12898: Federal Actions To Address
Environmental Justice in Minority Populations, and Low-Income
Populations
VIII. Statutory Authority

I. Executive Summary

    The Renewable Fuel Standard (RFS) program began in 2006 pursuant to
the requirements in Clean Air Act (CAA) section 211(o) that were added
through the Energy Policy Act of 2005 (EPAct). The statutory
requirements for the RFS program were subsequently modified through the
Energy Independence and Security Act of 2007 (EISA), resulting in the
publication of major revisions to the regulatory requirements on March
26, 2010.\1\ EISA's stated goals include moving the United States
toward ``greater energy independence and security, to increase the
production of clean renewable fuels.'' Today, nearly all of the
approximately 142 billion gallons of gasoline used for transportation
purposes contains 10 percent ethanol (E10), and a substantial portion
of diesel fuel contains biodiesel.
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    \1\ 75 FR 14670, March 26, 2010.
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    The fundamental objective of the RFS provisions under the CAA is
clear: To increase the use of renewable fuels in the U.S.
transportation system every year in order to reduce greenhouse gases
(GHGs) and increase energy security. Renewable fuels represent an
opportunity for the U.S. to move away from fossil fuels towards a set
of lower lifecycle GHG transportation fuels, and a chance for a still-
developing lower lifecycle GHG technology sector to grow. While
renewable fuels include corn starch ethanol, which is the predominant
renewable fuel in use to date, Congress envisioned the majority of
growth over time to come from advanced biofuels, as the non-advanced
(conventional) volumes remain constant in the statutory volume tables
starting in 2015 while the advanced volumes continue to grow.\2\
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    \2\ In this document we follow the common practice of using the
term ``conventional'' renewable fuel to mean any renewable fuel that
is not an advanced biofuel.
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    The statute includes annual volume targets, and requires EPA to
translate those volume targets (or alternative volume requirements
established by EPA in accordance with statutory waiver authorities)
into compliance obligations that refiners and importers must meet every
year. In this action, we are proposing the annual percentage standards
for cellulosic biofuel, biomass-based diesel, advanced biofuel, and
total renewable fuel that would apply to all gasoline and diesel
produced or imported in 2017. We are also proposing the applicable
volume of biomass-based diesel for 2018.
    In this action, we are proposing standards that are designed to
achieve the Congressional intent of increasing renewable fuel use over
time in order to reduce lifecycle GHG emissions of transportation fuels
and increase energy security, while at the same time accounting for the
real-world challenges that have slowed progress toward such goals.
Those challenges have made the volume targets established by Congress
for 2017 beyond reach for all but the minimum 1.0 billion gallons for
biomass-based diesel (BBD). We are proposing to use the waiver
mechanisms provided by Congress to establish volume requirements that
would be lower than the statutory targets for fuels other than biomass-
based diesel, but set at a level that we believe would spur growth in
renewable fuel use, consistent with Congressional intent.
    Our proposed 2017 volume requirements are ambitious, with
substantial growth in all categories relative to 2016. We are also
proposing a volume requirement for BBD for 2018 that would continue the
growth in that category of renewable fuel. The proposed volume
requirements are shown in Table I-1 below.

               Table I-1--Proposed Volume Requirements \a\
------------------------------------------------------------------------
                                               2017            2018
------------------------------------------------------------------------
Cellulosic biofuel (million gallons)....             312             n/a
Biomass-based diesel (billion gallons)..           b 2.0             2.1
Advanced biofuel (billion gallons)......             4.0             n/a
Renewable fuel (billion gallons)........            18.8             n/a
------------------------------------------------------------------------
\a\ All values are ethanol-equivalent on an energy content basis, except
  for BBD which is biodiesel-equivalent.
\b\ The 2017 BBD volume requirement was established in the 2014-2016
  final rule (80 FR 77420, December 14, 2015). We are not reproposing or
  inviting comment on this volume requirement and any such comment we do
  receive will be considered beyond the scope of this rulemaking.

    Our decision to propose volumes for total renewable fuel that rely
on using both the cellulosic waiver authority and the general waiver
authority is based on the same fundamental reasoning we relied upon in
the final rule ``Renewable Fuel Standard Program: Standards for 2014,
2015, and 2016 and Biomass-Based Diesel Volume for 2017,'' which
established the standards for 2014, 2015, and 2016 (hereinafter
referred to as the ``2014-2016 final rule'').\3\ Despite significant
increases in renewable fuel use in the United States, real-world
constraints, such as the slower than expected development of the
cellulosic biofuel industry and constraints in the marketplace needed
to supply certain biofuels to consumers, have made the timeline laid
out by Congress impossible to achieve. These challenges remain, even as
we recognize the success of the RFS program over the past decade in
boosting renewable fuel use, and the recent signs of progress towards
development of increasing volumes of advanced, low GHG-emitting fuels,
including cellulosic biofuels.
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    \3\ 80 FR 77420, December 14, 2015.
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    We believe that the RFS program can and will drive renewable fuel
use, and we have considered the ability of the market to respond to the
standards we set when we assessed the amount of renewable fuel that can
be supplied. Therefore, while this proposed rule applies the tools
Congress provided to make adjustments to the statutory volume targets
in recognition of the constraints that exist today, we believe the
standards we are proposing will drive growth in renewable fuels,
particularly advanced biofuels, which achieve the lowest lifecycle GHG
emissions. In our view, while Congress recognized that supply
challenges may exist as evidenced by the waiver provisions, it did not
intend growth in the renewable fuels market to be stopped by those
challenges, including those associated with the ``E10 blendwall.'' \4\
The fact that Congress chose to mandate increasing and substantial
amounts of renewable fuel clearly signals that it intended the RFS
program to create incentives to increase renewable fuel supplies and
overcome constraints in the market. The standards we are proposing
would provide those incentives.
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    \4\ The ``E10 blendwall'' represents the volume of ethanol that
can be consumed domestically if all gasoline contains 10% ethanol
and there are no higher-level ethanol blends consumed such as E15 or
E85.
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    As for past rulemakings establishing the annual standards under the
RFS program, the final standards that we set for 2017 and the final BBD
volume requirement for 2018 will take into account comments received in
response to this proposal and relevant new or updated information that
becomes available prior to the final rule.\5\ As a result, the final
standards that we set for 2017 and the final BBD volume requirement for
2018 may differ from those we have proposed.
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    \5\ For example, we intend in the final rule to use updated EIA
projections of gasoline and diesel fuel consumption, as well as
updated information on expected production of cellulosic biofuels.
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A. Purpose of This Action

    The national volume targets of renewable fuel that are intended to
be achieved under the RFS program each year (absent an adjustment or
waiver by EPA) are specified in CAA section 211(o)(2). The statutory
volumes for 2017 are shown in Table I.A-1. The cellulosic biofuel and
BBD categories are nested within the advanced biofuel category, which
is itself nested within the total renewable fuel category. This means,
for example, that each gallon of cellulosic biofuel or BBD that is used
to satisfy the individual volume requirements for those fuel types can
also be used to satisfy the requirements for advanced biofuel and total
renewable fuel.

   Table I.A-1--Applicable 2017 Volumes Specified in the Clean Air Act
                          [Billion gallons] \a\
------------------------------------------------------------------------

------------------------------------------------------------------------
Cellulosic biofuel......................................             5.5
Biomass-based diesel....................................           >=1.0
Advanced biofuel........................................             9.0
Renewable fuel..........................................            24.0
------------------------------------------------------------------------
\a\ All values are ethanol-equivalent on an energy content basis, except
  values for BBD which are given in actual gallons.

    Under the RFS program, EPA is required to determine and publish
annual percentage standards for each compliance year. The percentage
standards are calculated to ensure use in transportation fuel of the
national ``applicable volumes'' of the four types of biofuel
(cellulosic biofuel, BBD, advanced biofuel, and total renewable fuel)
that are set forth in the statute or established by EPA in accordance
with the Act's requirements. The percentage standards are used by
obligated parties (generally, producers and importers of gasoline and
diesel fuel) to calculate their individual compliance obligations. Each
of the four percentage standards is applied to the volume of non-
renewable gasoline and diesel that each obligated party produces or
imports during the specified calendar year to determine their
individual volume obligations with respect to the four renewable fuel
types. The individual volume obligations determine the number of RINs
of each renewable fuel type that each obligated party must acquire and
retire to demonstrate compliance.
    EPA is proposing the annual applicable volume requirements for
cellulosic biofuel, advanced biofuel, and total renewable fuel for
2017, and for BBD for 2018.\6\ Table I.A-2 lists the statutory
provisions and associated criteria relevant to determining the national
applicable volumes used to set the percentage standards in this
proposed rule.
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    \6\ The 2017 BBD volume requirement was established in the 2014-
2016 final rule.

    Table I.A-2--Statutory Provisions for Determination of Applicable
                                 Volumes
------------------------------------------------------------------------
                                                    Criteria provided in
                                  Clean Air Act         statute for
      Applicable volumes            reference         determination of
                                                     applicable volume
------------------------------------------------------------------------
Cellulosic biofuel............  211(o)(7)(D)(i)..  Required volume must
                                                    be lesser of volume
                                                    specified in CAA
                                                    211(o)(2)(B)(i)(III)
                                                    or EPA's projected
                                                    volume.
                                211(o)(7)(A).....  EPA in consultation
                                                    with other federal
                                                    agencies may waive
                                                    the statutory volume
                                                    in whole or in part
                                                    if implementation
                                                    would severely harm
                                                    the economy or
                                                    environment of a
                                                    State, region, or
                                                    the United States,
                                                    or if there is an
                                                    inadequate domestic
                                                    supply.
Biomass-based diesel \7\......  211(o)(2)(B)(ii)   Required volume for
                                 and (v).           years after 2012
                                                    must be at least 1.0
                                                    billion gallons, and
                                                    must be based on a
                                                    review of
                                                    implementation of
                                                    the program,
                                                    coordination with
                                                    other federal
                                                    agencies, and an
                                                    analysis of
                                                    specified factors.

                                211(o)(7)(A).....  EPA in consultation
                                                    with other federal
                                                    agencies may waive
                                                    the statutory volume
                                                    in whole or in part
                                                    if implementation
                                                    would severely harm
                                                    the economy or
                                                    environment of a
                                                    State, region, or
                                                    the United States,
                                                    or if there is an
                                                    inadequate domestic
                                                    supply.
Advanced biofuel..............  211(o)(7)(D)(i)..  If applicable volume
                                                    of cellulosic
                                                    biofuel is reduced
                                                    below the statutory
                                                    volume to the
                                                    projected volume,
                                                    EPA may reduce the
                                                    advanced biofuel and
                                                    total renewable fuel
                                                    volumes in CAA
                                                    211(o)(2)(B)(i)(I)
                                                    and (II) by the same
                                                    or lesser volume. No
                                                    criteria specified.
                                211(o)(7)(A).....  EPA in consultation
                                                    with other federal
                                                    agencies may waive
                                                    the statutory volume
                                                    in whole or in part
                                                    if implementation
                                                    would severely harm
                                                    the economy or
                                                    environment of a
                                                    State, region, or
                                                    the United States,
                                                    or if there is an
                                                    inadequate domestic
                                                    supply.
Total renewable fuel..........  211(o)(7)(D)(i)..  If applicable volume
                                                    of cellulosic
                                                    biofuel is reduced
                                                    below the statutory
                                                    volume to the
                                                    projected volume,
                                                    EPA may reduce the
                                                    advanced biofuel and
                                                    total renewable fuel
                                                    volumes in CAA
                                                    211(o)(2)(B)(i)(I)
                                                    and (II) by the same
                                                    or lesser volume. No
                                                    criteria specified.
                                211(o)(7)(A).....  EPA in consultation
                                                    with other federal
                                                    agencies may waive
                                                    the statutory volume
                                                    in whole or in part
                                                    if implementation
                                                    would severely harm
                                                    the economy or
                                                    environment of a
                                                    State, region, or
                                                    the United States,
                                                    or if there is an
                                                    inadequate domestic
                                                    supply.
------------------------------------------------------------------------

    As shown in Table I.A-2, the statutory authorities allowing EPA to
modify or set the applicable volumes differ for the four categories of
renewable fuel. Under the statute, EPA must annually determine the
projected volume of cellulosic biofuel production for the following
year. If the projected volume of cellulosic biofuel production is less
than the applicable volume specified in section 211(o)(2)(B)(i)(III) of
the statute, EPA must lower the applicable volume used to set the
annual cellulosic biofuel percentage standard to the projected volume
of production during the year. In Section III of this proposed rule, we
present our analysis of cellulosic biofuel production and the proposed
applicable volume for 2017. This analysis is based on an evaluation of
producers' production plans and progress to date following discussions
with cellulosic biofuel producers.
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    \7\ Section 211(o)(7)(E) also authorizes EPA in consultation
with other federal agencies to issue a temporary waiver of
applicable volumes of BBD where there is a significant feedstock
disruption or other market circumstance that would make the price of
BBD fuel increase significantly.
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    With regard to BBD, Congress chose to set aside a portion of the
advanced biofuel standard for BBD and CAA section 211(o)(2)(B)
specifies the applicable volumes of BBD to be used in the RFS program
only through year 2012. For subsequent years the statute sets a minimum
volume of 1 billion gallons, and directs EPA, in coordination with the
U.S. Departments of Agriculture (USDA) and Energy (DOE), to determine
the required volume after review of the renewable fuels program and
consideration of a number of factors. The BBD volume requirement must
be established 14 months before the year in which it will apply. In the
2014-2016 final rule we established the BBD volume for 2017. In Section
IV of this preamble we discuss our proposed assessment of statutory and
other relevant factors and our proposed volume requirement for BBD for
2018, which has been developed in coordination with USDA and DOE.\8\ We
are proposing growth in the required volume of BBD so as to provide
continued support to that important contributor to the pool of advanced
biofuel while at the same time providing continued incentive for the
development of other types of advanced biofuel.
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    \8\ The 2017 BBD volume requirement was established in the
December 14, 2015 final rule (80 FR 77420).
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    Regarding advanced biofuel and total renewable fuel, Congress
provided several mechanisms through which those volumes could be
reduced if necessary. If we lower the applicable volume of cellulosic
biofuel below the volume specified in CAA 211(o)(2)(B)(i)(III), we also
have the authority to reduce the applicable volumes of advanced biofuel
and total renewable fuel by the same or a lesser amount. We refer to
this as the ``cellulosic waiver authority.'' We may also reduce the
applicable volumes of any of the four renewable fuel types using the
``general waiver authority'' provided in CAA 211(o)(7)(A) if EPA, in
consultation with USDA and DOE, finds that implementation of the
statutory volumes would severely harm the economy or environment of a
State, region, or the United States, or if there is inadequate domestic
supply. Section II of this proposed rule describes our use of the
cellulosic waiver authority to reduce volumes of advanced biofuel and
total renewable fuel and the general waiver authority to further reduce
volumes of total renewable fuel. Consistent with the views that we
expressed in the 2014-2016 final rule, we continue to believe that the
exercise of our waiver authorities is necessary to address important
realities, including:
     Substantial limitations in the supply of cellulosic
biofuel,
     Insufficient supply of other advanced biofuel to offset
the shortfall in cellulosic biofuel, and
     Practical and legal constraints on the ability of the
market to supply renewable fuels to the vehicles and engines that can
use them.
    We believe these realities continue to justify the exercise of the
authorities Congress provided us to waive the statutory volumes. At the
same time, we are mindful that the primary objective of the statute is
to increase renewable fuel use over time. While available volumes of
all categories of renewable fuel have been increasing in recent years,
the statutory volume targets have been increasing as well. For the
total renewable fuel requirement in this rule, we are proposing to use
both the cellulosic biofuel and general waiver authorities only to the
extent necessary to derive the applicable volume of total renewable
fuel that reflects the

maximum supply that can reasonably be expected to be produced and
consumed by a market that is responsive to the RFS standards (hereafter
sometimes referred to as ``reasonably achievable supply''). This is a
very challenging task not only in light of the myriad of complexities
of the fuels market and how individual aspects of the industry might
change in the future, but also because we cannot precisely predict how
the market will respond to the volume-driving provisions of the RFS
program. Thus the determination of the total renewable fuel volume
requirement is one that we believe necessarily involves considerable
exercise of judgment. However, the circumstances facing us for this
proposal are not unlike those we faced in the 2014-2016 final rule, and
thus the approach we have taken to determining reasonably achievable
supply for 2017 is largely the same as that in the 2014-2016 final
rule. Based on our assessment of reasonably achievable supply, we
believe that an adjustment to the statutory target for total renewable
fuel is warranted for 2017. Nevertheless, as discussed in subsequent
sections of this rule, it is our intention that the proposed volume
requirements will lead to growth in supply beyond the levels achieved
in the past, based in part on the expectation that the market can and
will respond to the standards we set.
    For the advanced biofuel volume requirements, we are proposing to
use the cellulosic waiver authority alone to derive the volume
requirement for 2017 that is reasonably attainable and which to a
significant extent would result in backfilling the shortfall in
cellulosic biofuel volumes with other advanced biofuels that also
provide substantial GHG emission reductions.

B. Summary of Major Provisions in This Action

    This section briefly summarizes the major provisions of this
proposed rule. We are proposing applicable volume requirements and
associated percentage standards for cellulosic biofuel, advanced
biofuel, and total renewable fuel for 2017, as well as the percentage
standard for BBD for 2017, and the applicable volume requirement for
BBD for 2018.
1. Proposed Approach to Setting Volume Requirements
    It is our intention that the volume requirements and associated
percentage standards for 2017 will be issued on the statutory schedule,
providing the market with the time allotted by Congress to react to the
standards we set. For advanced biofuel and total renewable fuel, our
proposed assessment of supply simultaneously reflects the statute's
purpose to drive growth in renewable fuels, while also accounting for
constraints in the market that make the volume targets specified in the
statute beyond reach in the time set forth in the Act, as described
more fully in Section II. As described in Section III, the proposed
2017 cellulosic biofuel volume requirement is based on a projection of
production that reflects a neutral aim at accuracy. Our proposed
determination regarding the 2018 BBD volume requirement reflects an
analysis of a set of factors stipulated in CAA 211(o)(2)(B)(ii), as
described in more detail in Section IV.
    The approach we have taken in this proposal is essentially the same
as that presented in the 2014-2016 final rule. We believe that the
approach that we took in the 2014-2016 final rule to determining the
2016 volume requirements was successful in targeting levels that took
into account constraints in the supply of renewable fuel while
simultaneously accounting for the ability of the market to be
responsive to the standards we set to overcome some of those
constraints. As a result, we believe that it is appropriate to use the
same approach in our proposal for the 2017 volume requirements, and the
discussion of the derivation of the proposed volume requirements in
this proposal makes frequent reference to the 2014-2016 final rule.
Where data, analyses, or other information have changed since release
of the 2014-2016 final rule, we have noted the impact of such changes
on our assessment of achievable volumes for 2017.
2. Advanced Biofuel and Total Renewable Fuel
    Since the EISA-amended RFS program began in 2010, we have reduced
the applicable volume of cellulosic biofuel each year in the context of
our annual RFS standards rulemakings to the projected production
levels, and we have considered whether to also reduce the advanced
biofuel and total renewable fuel statutory volumes pursuant to the
waiver authority in section 211(o)(7)(D)(i). In the 2014-2016 final
rule, we determined that the volume of ethanol in the form of E10 or
higher ethanol blends such as E15 or E85 that could be supplied to
vehicles in 2016, together with the volume of non-ethanol renewable
fuels that could be supplied to vehicles, would be insufficient to
attain the statutory targets for both total renewable fuel and advanced
biofuel. As a result, we used the waiver authorities provided in CAA
211(o)(7)(D) to set lower volume requirements for these renewable fuel
categories in 2016, and we also used the waiver authority in CAA
211(o)(7)(A) to provide an additional further increment of reduction
for total renewable fuel.
    We believe that the conditions compelling us to reduce the
applicable 2016 volume requirements for advanced biofuel and total
renewable fuel below the statutory targets remain relevant in 2017. Our
proposed determination that the required volumes of advanced biofuel
and total renewable fuel should be reduced from the statutory targets
is based on a consideration of:
     The ability of the market to supply such fuels through
domestic production or import.
     The ability of available renewable fuels to be used as
transportation fuel, heating oil, or jet fuel.
     The ability of the standards to bring about market changes
in the time available.
     The ability of reasonably attainable volumes of non-
cellulosic advanced biofuels to backfill for unavailable volumes of
cellulosic biofuel.
    As described in more detail in Section II.A, we believe that the
availability of qualifying renewable fuels and constraints on their
supply to vehicles that can use them are valid considerations under
both the cellulosic waiver authority under CAA section 211(o)(7)(D)(i)
and the general waiver authority under CAA section 211(o)(7)(A). As for
2016, we are proposing to use the waiver authorities in a limited way
that reflects our understanding of how to reconcile real marketplace
constraints with Congress' intent to spur growth in renewable fuel use
over time.
    We are proposing applicable volumes for advanced biofuel and total
renewable fuel for 2017 that would result in significant volume growth
over the volume requirements for 2016. Moreover, the proposed volume
requirements for total renewable fuel are, in our judgment, as
ambitious as can reasonably be justified, and reflect the growth rates
that can be attained under a program explicitly designed to compel the
market to respond. We anticipate that the proposed advanced biofuel
volume requirement would result in reasonably attainable volumes of
advanced biofuel backfilling for missing cellulosic biofuel volumes.
3. Biomass-Based Diesel
    In EISA, Congress chose to set aside a portion of the advanced
biofuel standard for BBD, but only through 2012. Beyond 2012 Congress
stipulated that EPA, in coordination with other

agencies, was to establish the BBD volume taking into account the
intent of Congress to reduce GHG emissions and increase energy
security, along with the history of the program and various specified
factors, providing that the required volume for BBD could not be less
than 1.0 billion gallons. For 2013, EPA established an applicable
volume of 1.28 billion gallons. For 2014 and 2015 we established the
BBD volume requirement to reflect the actual volume for each of these
years of 1.63 and 1.73 billion gallons.\9\ For 2016 and 2017, we set
the BBD volumes at 1.9 and 2.0 billion gallons respectively.
---------------------------------------------------------------------------

    \9\ The 2015 BBD standard was based on actual data for the first
9 months of 2015 and on projections for the latter part of the year
for which data on actual use was not available.
---------------------------------------------------------------------------

    Given current and recent market conditions, the advanced biofuel
volume requirement is driving the biodiesel and renewable diesel
volumes, and we expect this to continue. Nevertheless we believe that
it is appropriate to set increasing BBD applicable volumes to provide a
floor to support continued investment to enable increased production
and use of BBD. In doing so we also believe in the importance of
maintaining opportunities for other types of advanced biofuel, such as
renewable diesel co-processed with petroleum, renewable gasoline blend
stocks, and renewable heating oil, as well as others that are under
development.
    Thus, based on a review of the implementation of the program to
date and all the factors required under the statute, and in
coordination with USDA and DOE, we are proposing an increase of 100
million gallons in the applicable volume of BBD, to 2.1 billion gallons
for 2018. We believe that this increase will support the overall goals
of the program while also maintaining the incentive for development and
growth in production of other advanced biofuels. Establishing the
volumes at this level will encourage BBD producers to manufacture
higher volumes of fuel that will contribute to the advanced biofuel and
total renewable fuel requirements, while also leaving considerable
opportunity within the advanced biofuel mandate for investment in and
growth in production of other types of advanced biofuel with comparable
or potentially superior environmental or other attributes.
4. Cellulosic Biofuel
    In the past several years the cellulosic biofuel industry has
continued to make progress towards significant commercial scale
production. Cellulosic biofuel production reached record levels in
2015, driven largely by compressed natural gas (CNG) and liquefied
natural gas (LNG) derived from biogas. Cellulosic ethanol, while
produced in much smaller quantities than CNG/LNG derived from biogas,
was also produced consistently in 2015. In this rule we are proposing a
cellulosic biofuel volume requirement of 312 million ethanol-equivalent
gallons for 2017 based on the information we have received regarding
individual facilities' capacities, production start dates and biofuel
production plans, as well as input from other government agencies, and
EPA's own engineering judgment.
    As part of estimating the volume of cellulosic biofuel that will be
made available in the U.S. in 2017, we considered all potential
production sources by company and facility. This included sources still
in the planning stages, facilities under construction, facilities in
the commissioning or start-up phases, and facilities already producing
some volume of cellulosic biofuel.\10\ From this universe of potential
cellulosic biofuel sources, we identified the subset that is expected
to produce commercial volumes of qualifying cellulosic biofuel for use
as transportation fuel, heating oil, or jet fuel by the end of 2017. To
arrive at projected volumes, we collected relevant information on each
facility. We then developed projected production ranges based on
factors such as the status of the technology being used, progress
towards construction and production goals, facility registration
status, production volumes achieved, and other significant factors that
could potentially impact fuel production or the ability of the produced
fuel to qualify for cellulosic biofuel Renewable Identification Numbers
(RINs). We also used this information to group these companies based on
production history and to select a value within the aggregated
projected production ranges that we believe best represents the most
likely production volumes from each group for each year. Further
discussion of these factors and the way they were used to determine our
final cellulosic biofuel projection for 2017 can be found in Section
III.
---------------------------------------------------------------------------

    \10\ Facilities primarily focused on research and development
(R&D) were not the focus of our assessment, as production from these
facilities represents very small volumes of cellulosic biofuel, and
these facilities typically have not generated RINs for the fuel they
have produced.
---------------------------------------------------------------------------

5. Annual Percentage Standards
    The renewable fuel standards are expressed as a volume percentage
and are used by each producer and importer of fossil-based gasoline or
diesel to determine their renewable fuel volume obligations. The
percentage standards are set so that if each obligated party meets the
standards, and if EIA projections of gasoline and diesel use for the
coming year prove to be accurate, then the amount of renewable fuel,
cellulosic biofuel, BBD, and advanced biofuel actually used will meet
the volume requirements used to derive the percentage standards,
required on a nationwide basis.
    Four separate percentage standards are required under the RFS
program, corresponding to the four separate renewable fuel categories
shown in Table I.A-1. The specific formulas we use in calculating the
renewable fuel percentage standards are contained in the regulations at
40 CFR 80.1405. The percentage standards represent the ratio of
renewable fuel volume to projected non-renewable gasoline and diesel
volume. The volume of transportation gasoline and diesel used to
calculate the final percentage standards was provided by the Energy
Information Administration (EIA). The proposed percentage standards for
2017 are shown in Table I.B.5-1. Detailed calculations can be found in
Section V, including the projected gasoline and diesel volumes used.

            Table I.B.5-1--Proposed 2017 Percentage Standards
------------------------------------------------------------------------

------------------------------------------------------------------------
Cellulosic biofuel......................................           0.173
Biomass-based diesel....................................            1.67
Advanced biofuel........................................            2.22
Renewable fuel..........................................           10.44
------------------------------------------------------------------------

C. Outlook for 2018 and Beyond

    As in the past, we acknowledge that a number of challenges still
need to be overcome in order to fully realize the potential for greater
use of renewable fuels in the United States as envisioned by Congress
in establishing the RFS requirements. The RFS program plays a central
role in creating the incentives for realizing that potential. The
standards being proposed reflect our understanding of the significant
progress that is being made in overcoming those challenges. We expect
future standards to both reflect and anticipate progress of the
industry and market in providing for continued expansion in the supply
of renewable fuels, and we intend to set standards in future years that
continue to capitalize on the market's ability to respond to those
standards with expansions in production and infrastructure.
    We believe that the supply of renewable fuels can continue to
increase in the coming years despite the

constraints associated with production of cellulosic biofuels and other
advanced biofuels, and constraints associated with supplying renewable
fuels to the vehicles and engines that can use them. We believe that
the market is capable of responding to ambitious standards by expanding
all segments of the market needed to increase renewable fuel supply and
to provide incentives for the production and use of renewable fuels.
    In future years, we would expect to use the most up-to-date
information available to project the growth that can realistically be
achieved considering the ability of the RFS program to spur growth in
the volume of ethanol, biodiesel, and other renewable fuels that can be
supplied and consumed by vehicles as we have for the 2017 volumes in
this proposal. In particular, we will focus on the emergence of
advanced biofuels including cellulosic biofuel, consistent with the
statute. Many companies are continuing to invest in efforts ranging
from research and development, to the construction of commercial-scale
facilities to increase the production potential of next generation
biofuels. We will continue to evaluate new pathways especially for
advanced biofuels and respond to petitions, expanding the availability
of feedstocks, production technologies, and fuel types eligible under
the RFS program.
    In addition to ongoing efforts to evaluate new pathways for
advanced biofuel production, we are aware that other actions can also
play a role in overcoming challenges that limit the potential for
supply of increased volumes of renewable fuels. We are currently
considering and evaluating regulatory provisions that should enhance
the ability of the market to increase not only the production of
advanced and cellulosic biofuels but also the use of higher-level
ethanol blends such as E15 and E85. DOE and USDA are continuing to
provide funds for the development of new technologies and expansion of
infrastructure. All of this, as well as actions not yet defined, is
expected to continue to help clear hurdles to support the ongoing
growth in the use of renewable fuels in future years.

II. Advanced Biofuel and Total Renewable Fuel Volumes for 2017

    The national volume targets of advanced biofuel and total renewable
fuel to be used under the RFS program each year through 2022 are
specified in CAA section 211(o)(2). Congress set targets that
envisioned growth at a pace that far exceeded historical growth and
prioritized that growth as occurring principally in advanced biofuels
(contrary to historical growth patterns). Congressional intent is
evident in the fact that the non-advanced volumes remain at a constant
15 billion gallons in the statutory volume tables starting in 2015
while the advanced volumes continue to grow through 2022 to a total of
21 billion gallons, for a total of 36 billion gallons in 2022.
    While Congress set ambitious volume targets as a mechanism to push
renewable fuel volume growth under the RFS program, Congress also
provided EPA with waiver authority, in part to address the situation
where supply of renewable fuel does not match these ambitious target
levels. EPA may reduce the volume targets to the extent that we reduce
the applicable volume for cellulosic biofuel pursuant to CAA
211(o)(7)(D), or if the criteria are met for use of the general waiver
authority under CAA 211(o)(7)(A). As described in this section, we
believe that reductions in both the advanced biofuel and total
renewable fuel volume targets are necessary for 2017.
    While the statute and legislative history offer little guidance on
the specific considerations underlying the statutory volume targets, we
believe it is highly unlikely that Congress expected those volume
targets to be reached only through the consumption of E10 and biomass-
based diesel; while the statute does require the use of a minimum
volume of BBD, it does not explicitly require the use of ethanol. Today
we know that possible approaches to significantly expand renewable fuel
use fall into a number of areas, such as:
     Increased use of E15 in model year 2001 and later
vehicles,
     Increased use of E85 or other higher level ethanol blends
in flex-fuel vehicles (FFVs),
     Increased production and/or importation of non-ethanol
biofuels (e.g., biodiesel, renewable diesel, renewable gasoline, and
butanol) for use in conventional vehicles and engines,
     Increased use of biogas in CNG vehicles,
     Increased use of renewable jet fuel and heating oil,
     Increased use of cellulosic and other non-food based
feedstocks, and
     Co-development of new technology vehicles and engines
optimized for new fuels.
    While we believe that developments in some of these areas have been
and will continue to occur, and that such changes will contribute to
growth in supply in 2017, we do not believe that those developments
will be sufficient to reach the statutory volume targets in this year.
Volume requirements over the longer term that are issued in a timely
manner and which provide the certainty of a guaranteed and growing
future market are necessary for the industry to have the incentive to
invest in the development of new technology and expanded infrastructure
for production, distribution, and dispensing capacity. We believe that
over time use of both higher level ethanol blends and non-ethanol
biofuels can and will increase, consistent with Congressional intent to
increase total renewable fuel use through the enactment of EPAct and
EISA. As stated above, while Congress provided waiver authority to
account for supply and other challenges, we do not believe that
Congress intended that the E10 blendwall or any other particular
limitation would present a barrier to the expansion of renewable fuels.
The fact that Congress set volume targets reflecting increasing and
substantial amounts of renewable fuel use clearly signals that it
intended the RFS program to create incentives to increase renewable
fuel supplies and overcome supply limitations. Notwithstanding these
facts, Congress also authorized EPA to adjust statutory volumes as
necessary to reflect situations involving shortfalls in cellulosic
biofuel production, inadequate domestic supply, or where EPA determines
that severe economic or environmental harm would result from program
implementation.
    We have evaluated the capabilities of the market and have concluded
that the volumes for advanced biofuel and total renewable fuel
specified in the statute cannot be achieved in 2017. This is due in
part to the expected continued shortfall in cellulosic biofuel;
production of this fuel type has consistently fallen short of the
statutory targets by 95% or more (about 4 billion gallons in 2016), and
projected production volumes for 2017, while continuing to grow, are
consistent with this trend. In addition, although in earlier years of
the RFS program we determined that the available supply of advanced
biofuel and other considerations justified our retaining the statutory
advanced biofuel and total renewable fuel volumes notwithstanding the
shortfall in cellulosic biofuel production, the more recent statutory
targets and continued sluggish pace of cellulosic biofuel production
precluded such a determination for 2014, 2015, and 2016. We project
that the same circumstances will continue in 2017. As a result, we are
proposing to exercise the statutory waiver authorities to reduce the

applicable volumes of advanced biofuel and total renewable fuel.
Nevertheless, while we are proposing to use the waiver authorities
available under the law to reduce applicable volumes from the statutory
levels, we intend to set the total volume requirement at the maximum
reasonably achievable level that will drive significant growth in
renewable fuel use beyond what would occur in the absence of such a
requirement, as Congress intended. The proposed volume requirements
recognize the ability of the market to respond to the standards we set
while staying within the limits of feasibility. The net impact of these
proposed volume requirements would be that the necessary volumes of
both advanced biofuel and conventional (non-advanced) renewable fuel
would significantly increase over levels used in the past.
    Our analytic approach is to first ascertain the maximum reasonably
achievable volumes of all types of renewable fuel. Having done so, we
next determine the extent to which a portion of those fuels should be
required to be advanced. We then propose to use the cellulosic waiver
authority to provide equal reductions in advanced and total renewable
fuel volumes, and the general waiver authority to justify the
additional incremental reduction in total volumes necessary to
alleviate inadequacy of supply of total renewable fuels. Based on this
approach, the volumes that we are proposing are shown below.

              Table II-1--Proposed 2017 Volume Requirements
                            [Billion gallons]
------------------------------------------------------------------------
                                             Proposed        Statutory
------------------------------------------------------------------------
Advanced biofuel........................             4.0             9.0
Total renewable fuel....................            18.8            24.0
------------------------------------------------------------------------

A. Statutory Authorities for Reducing Volume Targets

    In CAA 211(o)(2), Congress specified increasing annual volume
targets for total renewable fuel, advanced biofuel, and cellulosic
biofuel for each year through 2022, and for biomass-based diesel
through 2012, and authorized EPA to set volume requirements for
subsequent years in coordination with USDA and DOE, and after
consideration of specified factors. However, Congress also recognized
that circumstances may arise that necessitate deviation from the
statutory volumes and thus provided waiver provisions in CAA 211(o)(7).
We believe, as we did in setting the volumes from 2014-2016, that the
circumstances justifying use of the waiver authorities and thus a
reduction in statutory volumes are currently present, and we are
proposing to again use our waiver authorities under both 211(o)(7)(D)
and 211(o)(7)(A) to reduce volume requirements. Congress envisioned
that there would be 5.5 billion gallons of cellulosic biofuel in 2017,
while we estimate the potential for 312 million gallons. Under
211(o)(7)(D), EPA must lower the required cellulosic volume to the
projected production volumes. Doing so also provides EPA with authority
to lower advanced and total renewable fuel volumes by the same or a
lesser amount. Additionally, we believe that even after reducing total
renewable fuel volumes to the full extent possible under the cellulosic
waiver authority in 211(o)(7)(D), there is an inadequate domestic
supply of renewable fuel to achieve those volumes, both warranting and
justifying a further reduction in the total renewable fuel volumes
under the authority of 211(o)(7)(A). The inadequate domestic supply is
due to a combination of projected limitations in the production and
importation of qualifying renewable fuels, as well as factors limiting
supplying those fuels to the vehicles that can consume them.
1. Cellulosic Waiver Authority
    Section 211(o)(7)(D) of the CAA provides that if the projected
volume of cellulosic biofuel production is less than the minimum
applicable volume in the statute, EPA shall reduce the applicable
volume of cellulosic biofuel required to the projected volume
available. For 2017, we are proposing to reduce the applicable volume
of cellulosic biofuel under this authority.
    Section 211(o)(7)(D) also provides EPA with the authority to reduce
the applicable volume of total renewable fuel and advanced biofuel in
years where it reduces the applicable volume of cellulosic biofuel. The
reduction must be less than or equal to the reduction in cellulosic
biofuel. For 2017, we are also proposing to reduce applicable volumes
of advanced biofuel and total renewable fuel under this authority.
    The cellulosic waiver authority is discussed in detail in the
preamble to the 2014-2016 final rule. See also, API v. EPA, 706 F.3d
474 (D.C. Cir. 2013) (requiring that EPA's cellulosic biofuel
projections reflect a neutral aim at accuracy); Monroe Energy v. EPA,
750 F.3d 909 (D.C. Cir. 2014) (affirming EPA's broad discretion under
the cellulosic waiver authority to reduce volumes of advanced biofuel
and total renewable fuel).
2. General Waiver Authority
    Section 211(o)(7)(A) of the CAA provides that EPA, in consultation
with the Secretary of Agriculture and the Secretary of Energy, may
waive the applicable volumes of total renewable fuel, after public
notice and comment based on a determination that there is an inadequate
domestic supply. In addition to proposing to use the cellulosic waiver
authority to lower total renewable fuel volumes, we are also proposing
to further reduce total renewable fuel volumes for 2017 using the
general waiver authority.
    EPA interpreted and applied this waiver provision in the 2014-2016
final rule, and concluded that it was appropriate to use this authority
in combination with the cellulosic waiver authority to reduce total
renewable volumes for those years. EPA, in consultation with DOE and
USDA, continues to find that the circumstances justifying the use of
the general waiver authority exist and support a finding of inadequate
domestic supply. As discussed in the 2014-2016 final rule, we find that
this undefined provision is reasonably and best interpreted to
encompass the full range of constraints that could result in an
inadequate supply of renewable fuel to the ultimate consumers,
including fuel production, infrastructure and other constraints. This
includes, for example, factors affecting the ability to produce or
import biofuels as well as factors affecting the ability to distribute,
blend, dispense, and consume those renewable fuels as transportation
fuel, jet fuel or heating oil.
    A full discussion of EPA's interpretation of this waiver authority
can be found in the 2014-2016 final rule. A full discussion of EPA's
proposed determination that there is an ``inadequate domestic supply''
of total

renewable fuel in 2017 can be found in Section II.B below.
3. Combining Authorities for Reductions in Total Renewable Fuel
    We are again proposing to reduce the applicable volumes of total
renewable fuel for 2017 using two distinct authorities. Proposed
initial reductions in total renewable fuel correspond to the volume
reduction in advanced biofuels, using the cellulosic waiver authority.
We are proposing to reduce total renewable fuel further based on a
determination of inadequate domestic supply. We are proposing to use
the cellulosic waiver authority to reduce the statutory volume for
total renewable fuel by an initial increment of 5.0 billion gallons for
2017. In addition, we are proposing to use the general waiver authority
exclusively as the basis for further reducing the applicable volume of
total renewable fuel by an additional 0.2 billion gallons in 2017.

B. Proposed Determination of Inadequate Domestic Supply

    In order to use the general waiver authority in CAA 211(o)(7)(A) to
reduce the applicable volumes of total renewable fuel, we must make a
determination that there is either ``inadequate domestic supply'' or
that implementation of the statutory volumes would severely harm the
economy or environment of a State, a region or the United States. This
section summarizes our proposed determination that there will be an
inadequate domestic supply of total renewable fuel in 2017, and thus
that the statutory volume targets are not achievable with volumes that
can reasonably be supplied in this year. Additionally, this proposed
determination that the statutory volume targets are not achievable with
volumes supplied would also support our use of the cellulosic waiver
authority under CAA 211(o)(7)(D) to reduce the applicable volumes of
advanced and total renewable fuel.
    The statute sets a target of 24.0 billion gallons of total
renewable fuel for 2017. We believe that this volume cannot be achieved
under even the most optimistic assumptions given current and near-
future circumstances. To make this proposed determination, we began by
assuming that every gallon of gasoline would contain 10% ethanol, and
that the supply of conventional and advanced biodiesel and renewable
diesel volumes would be equal to those supplied in 2015. These volumes
are clearly attainable, based on readily available information and
analysis. However, when these supplies of renewable fuel are taken into
account, a significant additional volume of renewable fuel would be
needed to meet the statutory volume target.

Table II.B-1--Additional Volumes Needed To Meet the Statutory Target for
                      Total Renewable Fuel in 2017
                  [Million ethanol-equivalent gallons]
------------------------------------------------------------------------

------------------------------------------------------------------------
Statutory target for total renewable fuel....................     24,000
Maximum ethanol consumption as E10 \a\.......................    -14,205
Historical maximum supply of biodiesel and renewable diesel       -2,930
 \b\.........................................................
Additional volumes needed....................................      6,865
------------------------------------------------------------------------
\a\ Derived from projected gasoline energy demand from EIA's Short-Term
  Energy Outlook (STEO) from April, 2016. We intend to use updated EIA
  information for the final rule.
\b\ Represents the 1.90 billion gallons of biodiesel and renewable
  diesel supplied in 2015.

    Based on the current and near-future capabilities of the industry,
we expect that only a relatively small portion of the additional
volumes needed would come from non-ethanol cellulosic biofuel, non-
ethanol advanced biofuels other than BBD, and non-ethanol conventional
renewable fuels other than biodiesel and renewable diesel. In 2015, the
total ethanol-equivalent volume for all of these sources was 163
million gallons, and we projected that 235 million gallons would be
available in 2016 in our 2014-2016 final rule. In 2017 we believe that
these sources could be 300 million gallons or more based on the
expectation that the growth which is expected to occur between 2015 and
2016 will continue in 2017. Taking these sources into account, we
estimate that the volume of additional renewable fuel needed in 2017
would be about 6,600 million gallons.
    Aside from these relatively small sources, renewable fuel that
could fulfill the need for the additional volumes needed to reach the
statutory targets in 2017 would be additional ethanol in the form of
E15 or E85, additional biodiesel and renewable diesel, or some
combination of these sources. Table II.B-2 provides examples of the
additional volumes that would be needed if the 2017 statutory target
for total renewable fuel were not waived.

    Table II.B-2--Examples of Fuel Types Needed to Meet the Statutory
                Targets for Total Renewable Fuel in 2017
        [Million physical gallons of fuel unless otherwise noted]
------------------------------------------------------------------------

------------------------------------------------------------------------
Additional volumes needed (ethanol-equivalent)..........           6,600
Meeting the need for additional volumes using only E15..         127,790
Meeting the need for additional volumes using only E85             9,980
 \a\....................................................
Meeting the need for additional volumes using only                 4,400
 biodiesel \b\..........................................
Meeting the need for additional volumes using a
 combination of E15, E85, and biodiesel:
    E15.................................................           2,980
    E85.................................................           2,980
    Biodiesel...........................................           2,980
------------------------------------------------------------------------
\a\ Although E85 is assumed to contain 74% ethanol, the use of E85 also
  displaces some E10. Thus every gallon of ethanol use in excess of the
  E10 blendwall requires 1.51 gallons of E85.
\b\ Each gallon of biodiesel represents 1.5 gallons of renewable fuel in
  the context of fulfilling the total renewable fuel volume requirement.

    Although a combination of E15, E85, and biodiesel would in theory
reduce the overall burden on the market to supply the additional
volumes needed, the necessary volumes would nevertheless still be far
beyond reach. E85 volumes in 2014 only reached about 150 million
gallons, and in 2015 we estimate that it rose to about 166 million
gallons.11 12 In deriving the 2016 volume requirements we
estimated that E85 volumes would increase to 200 million gallons,
though we also said that 400 million gallons was possible under highly
favorable though unlikely conditions. More importantly, our assessment
of the potential for growth in E85 that we discussed in the 2014-2016
final rule has changed little in the months since. While growth in E85
supply most certainly can increase in 2017, and programs such as USDA's
Biofuel Infrastructure Partnership (BIP) can assist in this effort,
there continue to be constraints associated with the weak response of
flexible fuel vehicle (FFV) owners to E85 price reductions in
comparison to E10 and the failure of RIN prices to be fully passed
through to retail fuel prices. As a result, we do not believe that an
E85 supply expansion to 2.98 billion gallons can occur in 2017.
---------------------------------------------------------------------------

    \11\ ``Estimating E85 Consumption in 2013 and 2014,'' Dallas
Burkholder, Office of Transportation and Air Quality, US EPA.
November 2015. EPA Docket EPA-HQ-OAR-2015-0111.
    \12\ ``Preliminary estimate of E85 consumption in 2015,'' David
Korotney, Office of Transportation and Air Quality, US EPA. April
2016. EPA Docket EPA-HQ-OAR-2016-0004.
---------------------------------------------------------------------------

    Similarly, we do not believe that 2.98 billion gallons of E15 can
be supplied in 2017. We projected that 320 million gallons of E15 could
be supplied in 2016 based on new infrastructure paid for through USDA's
BIP program, and this volume could double in 2017 after the BIP program
is fully phased in. As described more fully in Section II.E below,
under favorable conditions E15 volumes as high as 800 million gallons
might be possible in 2017. However, achieving nearly 3 billion gallons
of E15 would require significantly higher growth rates in the number of
retail stations offering E15, and/or significantly more favorable
pricing for E15 compared to E10. We have seen no evidence that the
market is capable of such dramatic changes between today and the end of
2017.
    Finally, the necessary volume of advanced and conventional
biodiesel that would be needed to avoid a waiver of the statutory
target for total renewable fuel, even if combined with substantial
increases in E15 and E85 use, is also beyond reach in 2017. For
instance, the 2.98 billion gallons of biodiesel shown in Table II.B-2
would be in addition to the 1.9 billion gallons already assumed in
Table II.B-1, such that the total volume of conventional and advanced
biodiesel needed would be about 5 billion gallons. A total of 5 billion
gallons is far higher than the production capacity of all domestic
biodiesel facilities, even if accounting for those facilities that are
not currently registered under the RFS program. Imports of biodiesel
and renewable diesel have historically been much lower than domestic
production, reaching a maximum of 470 million gallons in 2015, and thus
could not reasonably be expected to fill the gap left by the shortfall
in domestic production capacity. The use of 5 billion gallons of
biodiesel, equivalent to about 10% of the nationwide diesel pool, would
also be constrained by distribution, blending, and dispensing
infrastructure. Not only are some areas of the country beyond
reasonable reach of biodiesel supply centers, as described in Section
III.E.3.iv, but some retailers reduce or modify offerings of biodiesel
blends in winter months to account for the higher propensity of
biodiesel blends to gel in colder temperatures. Also, a significant
portion of the in-use fleet is made up of highway and nonroad diesel
engines that are warranted for no more than 5% biodiesel. These
considerations are similar to those referenced in the 2014-2016 final
rule since little has changed in the months since that could
significantly change the potential supply in 2017. In the 2014-2016
final rule, we projected that total biodiesel and renewable diesel
volumes could reach 2.5 billion gallons in 2016, which was a
significant increase from the 2015 actual supply of 1.9 billion
gallons. Even under the most optimistic circumstances, total biodiesel
and renewable diesel supply cannot double within one year.
    We are also proposing to use the cellulosic waiver authority to
reduce volumes of advanced biofuel. Our proposed action is based in
part on a determination that the statutory volume targets for advanced
biofuel cannot be met in 2017. To make this proposed determination, we
took a similar approach to that used for total renewable fuel in Table
II.B-1: We first accounted for our proposed volume requirements for
cellulosic biofuel and BBD, as well as an estimate of the volume of
other non-ethanol advanced biofuel that may be possible in 2017 based
on supply in previous years to yield an estimate of readily available
volumes. When these supplies of advanced biofuel are taken into
account, a significant additional volume of advanced biofuel would
still be needed for the statutory volume targets to be met.\13\
---------------------------------------------------------------------------

    \13\ The vast majority of these additional volumes needed are
due to a shortfall in cellulosic biofuel in comparison to the
statutory target of 5.5 billion gallons for 2017.

  Table II.B-3--Additional Volumes Needed To Meet Statutory Targets for
                        Advanced Biofuel in 2017
                  [Million ethanol-equivalent gallons]
------------------------------------------------------------------------

------------------------------------------------------------------------
Statutory target for advanced biofuel......................        9,000
Proposed requirement for cellulosic biofuel................          312
Biomass-based diesel.......................................    \a\ 3,000
Potential other non-ethanol advanced.......................       \b\ 50
Additional volumes needed..................................        5,638
------------------------------------------------------------------------
\a\ Represents 2.0 billion gal of BBD that was established in the 2014-
  2016 final rule. Each gallon of biodiesel generates 1.5 RINs.
\b\ Supply of non-ethanol advanced biofuel other than BBD and cellulosic
  biofuel was 53 million gal in 2014 and 33 million gal in 2015. Given
  the variability in this source over these two years, we have rounded
  to 50 mill gal for this assessment.

    Based on historic patterns and our understanding of production
capacity and feedstock availability, we believe that advanced biofuel
that could fulfill the need for the additional volumes needed to reach
the statutory target in 2017 would primarily be imported sugarcane
ethanol or BBD in excess of the BBD standard. Table II.B-4 provides
examples of the additional volumes that would be needed.

    Table II.B-4--Examples of Fuel Types Needed To Meet the Statutory
                  Targets for Advanced Biofuel in 2017
            [Million physical gallons unless otherwise noted]
------------------------------------------------------------------------

------------------------------------------------------------------------
Additional volumes needed (ethanol-equivalent)..........           5,638
Meeting the need for additional volumes using only                 5,638
 imported sugarcane ethanol.............................
Meeting the need for additional volumes using only BBD             3,759
 \a\....................................................

Meeting the need for additional volumes using a
 combination of imported sugarcane ethanol and BBD:
    Sugarcane ethanol...................................           2,255
    BBD.................................................           2,255
------------------------------------------------------------------------
\a\ Assumed to be biodiesel. Each gallon of biodiesel represents 1.5
  gallons of renewable fuel in the context of fulfilling the advanced
  biofuel volume requirement.

    Even if the additional volumes of advanced biofuel needed to avoid
a waiver were shared between imported sugarcane ethanol and BBD, the
necessary volumes of both would be far in excess of what we believe is
reasonably achievable. For instance, imports of sugarcane ethanol have
been highly variable in the past, and the highest volume of sugarcane
ethanol that has ever been imported to the U.S. was 680 million gallons
in 2006. Moreover, notwithstanding an estimate of 2 billion gallons of
sugarcane ethanol supply from the Brazilian Sugarcane Industry
Association (UNICA) submitted in response to the June 10, 2015 proposal
for the 2016 standards, we do not believe that 2.26 billion gallons
could be exported from Brazil to the U.S. in 2017. The 2016 standards
that we established in the 2014-2016 final rule were based in part on a
projection of 200 million gallons of imported sugarcane ethanol. Our
current views of the potential supply of imported sugarcane ethanol for
2017 are largely the same as those discussed in the 2014-2016 final
rule, and we refer readers to that rule for further discussion.\14\
---------------------------------------------------------------------------

    \14\ See 80 FR 77476.
---------------------------------------------------------------------------

    Under a scenario wherein growth in sugarcane ethanol and BBD both
contributed to providing the additional volumes needed to avoid a
waiver of the advanced biofuel statutory target, the total volume of
BBD required under the RFS program would also be far in excess of what
is achievable in 2017. For instance, the 2.26 billion gallons of BBD
shown in Table II.B-4 above would be in addition to the 2.0 billion
gallon volume requirement for BBD, such that the total volume of BBD
needed would be 4.26 billion gallons. For many of the same reasons
discussed above in the context of the inability to meet the statutory
targets for total renewable fuel, this level of BBD is not achievable
in 2017.
    In the 2014-2016 final rule, we discussed the fact that the market
is not unlimited in its ability to respond to the standards EPA sets.
We continue to believe that setting the volume requirements at the
statutory targets would not compel the market to respond with
sufficient changes in production levels, infrastructure, and fuel
pricing at retail to result in the statutory volumes actually being
consumed in 2017, but would instead lead to a complete draw-down in the
bank of carryover RINs (which, as discussed in Section II.C, we do not
believe to be in the best interest of the program), noncompliance, and/
or additional petitions for a waiver of the standards.

C. Total Renewable Fuel Volume Requirement

    We are proposing to exercise our authority to waive the volume of
total renewable fuel under the general waiver authority for 2017, since
reductions using the cellulosic authority alone would be insufficient
to alleviate the inadequacy in supply. Our objective is to exercise the
general waiver authority only to the extent necessary to address the
inadequacy in supply. We are seeking to determine the ``maximum''
volumes of renewable fuel that are reasonably achievable in light of
supply constraints. To clarify, we are not aiming to identify the
absolute maximum domestic supply that could be available in an ideal or
unrealistic situation, or a level that might be anticipated under
conditions that are possible, but unlikely to occur. Rather, we are
attempting to identify what we believe is the most likely maximum
volume that can be made available under real world conditions, taking
into account the ability of the standards we set to cause a market
response and result in increases in the supply of renewable fuels. This
is a very challenging task not only in light of the myriad complexities
of the fuels market and how individual aspects of the industry might
change in the future, but also because we cannot precisely predict how
the market will respond to the volume-driving provisions of the RFS
program. Thus, although the determination is founded on our analyses
and evaluation of the available information, the determination is also
one that we believe is not given to precise measurement and necessarily
involves considerable exercise of judgment.
    Our intention for 2017 is to establish a requirement for total
renewable fuel that takes into account the ability of the market to
respond to the standards we set, and is the maximum that is reasonably
achievable given the various constraints on supply. In this context, we
continue to believe that the constraints associated with the E10
blendwall do not represent a firm barrier that cannot or should not be
crossed. Rather, the E10 blendwall marks the transition from relatively
straightforward and easily achievable increases in ethanol consumption
as E10 to those increases in ethanol consumption as E15 and E85 that
are more challenging to achieve. To date we have seen no compelling
evidence that the nationwide average ethanol concentration in gasoline
cannot exceed 10.0%.
    However, we also recognize that the market is not unlimited in its
ability to respond to the standards we set. This is true both for
expanded use of ethanol and for non-ethanol renewable fuels. The fuels
marketplace in the United States is large, diverse, and complex, made
up of many different players with different, and often competing,
interests. Substantial growth in the renewable fuel volumes beyond
current levels will require action by many different parts of the fuel
market, and a constraint in any one part of the market can limit the
growth in renewable fuel supply. Whether the primary constraint is in
the technology development and commercialization stages, as has been
the case with cellulosic biofuels, or is instead related to the
development of distribution infrastructure, as is recently the case
with ethanol and biodiesel in the United States, the end result is that
these constraints limit the growth rate in the available supply of
renewable fuel as transportation fuel, heating oil, or jet fuel. These
constraints were discussed in detail in the 2014-2016 final rule, and
we believe that the same constraints will operate to limit supply for
2017 as well.\15\ Other factors outside the purview of the RFS program
also impact

the supply of renewable fuel, including the price of crude oil and
global supply and demand of both renewable fuels and their feedstocks.
These factors add uncertainty to the task of estimating volumes of
renewable fuel that can be supplied in the future.
---------------------------------------------------------------------------

    \15\ See 80 FR 77450.
---------------------------------------------------------------------------

    While the constraints are real and must be taken into account when
we determine maximum reasonably achievable volumes of total renewable
fuel for 2017, none of those constraints represent insurmountable
barriers to growth. Rather, they are challenges that can be overcome in
a responsive marketplace given enough time and with appropriate
investment. The speed with which the market can overcome these
constraints is a function of whether and how effectively parties
involved in the many diverse aspects of renewable fuel supply respond
to the challenges associated with transitioning from fossil-based fuels
to renewable fuels, the incentives provided by the RFS program, and
other programs designed to incentivize renewable fuel use. As discussed
in the following sections, we believe that the total renewable fuel
volume requirements that we are proposing for 2017 reflect the extent
to which market participants can reasonably be expected to respond
within the time period in question to increase renewable fuel supplies.
    Consistent with our approach in the 2014-2016 final rule, we have
also considered the availability of carryover RINs in our proposed
decision to exercise our waiver authorities in setting the volume
requirements for 2017. Other than requiring a credit program, neither
the statute nor EPA regulations specify how or whether EPA should
consider the availability of carryover RINs in exercising its waiver
authorities either in the standard-setting context or in response to
petitions for a waiver during a compliance year. The availability of
carryover RINs is important both to individual compliance flexibility
and operability of the program as whole. We believe that carryover RINs
are extremely important in providing obligated parties compliance
flexibility in the face of substantial uncertainties in the
transportation fuel marketplace, and in providing a liquid and well-
functioning RIN market upon which success of the entire program
depends. As described in the 2007 rulemaking establishing the RFS
regulatory program,\16\ and further reiterated in the 2014-2016 final
rule,\17\ carryover RINs are intended to provide flexibility in the
face of a variety of circumstances that could limit the availability of
RINs, including weather-related damage to renewable fuel feedstocks and
other circumstances affecting the supply of renewable fuel that is
needed to meet the standards.
---------------------------------------------------------------------------

    \16\ 72 FR 23900, May 1, 2007.
    \17\ See 80 FR 77482-77487.
---------------------------------------------------------------------------

    At the time of the 2014-2016 final rule, we estimated that there
were at most 1.74 billion carryover RINs available and decided that
carryover RINs should not be counted on to avoid or minimize the need
to reduce the 2014, 2015, and 2016 statutory volume targets. We also
stated that we may or may not take a similar approach in future years,
and that we would evaluate the issue on a case-by-case basis
considering the facts present in future years. Since that time,
obligated parties have submitted their compliance demonstrations for
the 2013 compliance year and we now estimate that there are now at most
1.72 billion carryover RINs available, a decrease of 20 million RINs
from the previous estimate of 1.74 billion carryover RINs. Since we
established the 2014 and the 2015 RFS volume standards at essentially
the same level of renewable fuel supplied for those years, we do not
expect there to be an appreciable change in the number of available
carryover RINs after compliance demonstrations are made for the 2014
and 2015 compliance years.\18\
---------------------------------------------------------------------------

    \18\ The compliance demonstration deadlines for the 2014 and
2015 RFS standards are August 1, 2016, and December 1, 2016,
respectively.
---------------------------------------------------------------------------

    For 2016, we established standards that represented a significant
increase in the renewable fuel volume targets from 2014 and 2015. In
the 2014-2016 final rule, we stated that these standards may result in
a drawdown in the carryover RIN bank, although an intentional drawdown
was not assumed in setting the volume standards. However, we will
likely not have data showing whether or not there has been an
appreciable change in the size of the bank of carryover RINs until
after the 2017 RFS standards have been established.\19\ Therefore,
there is considerable uncertainty regarding the total number of
carryover RINs that may be available for compliance with the 2017
standards. Given this uncertainty, we believe that it would be prudent,
and would advance the long-term objectives of the CAA, not to propose
standards for 2017 so as to intentionally draw down the current bank of
carryover RINs. Assuming the bank of carryover RINs either remains
constant after 2016 compliance demonstrations are made or is reduced,
we believe that the availability of the full volume of those carryover
RINs will be important for both obligated parties and the efficient
functioning of the RFS program itself in addressing significant future
uncertainties and challenges, particularly since we would expect
compliance with the proposed advanced and total renewable fuel
standards to require significant progress in growing and sustaining
increased production and use of renewable fuels. We believe it is
highly unlikely that the bank of carryover RINs will be larger after
2016 compliance demonstrations are made; however, if this is the case,
we will take that fact into consideration in setting future standards.
---------------------------------------------------------------------------

    \19\ The compliance demonstration date for the 2016 RFS
standards is March 31, 2017, while the statutory deadline for
establishing the 2017 RFS standards is November 30, 2016.
---------------------------------------------------------------------------

    For the reasons noted above, and consistent with the approach we
took in the 2014-2016 final rule, we believe that the collective bank
of carryover RINs that we anticipate will be available in 2017 should
be retained, and not intentionally drawn down, to provide an important
and necessary programmatic buffer that will both facilitate individual
compliance and provide for smooth overall functioning of the program.
Therefore, we are not proposing to set renewable fuel volume
requirements at levels that would envision the drawdown in the bank of
carryover RINs.
1. Ethanol
    Ethanol is the most widely produced and consumed biofuel, both
domestically and globally. Since the beginning of the RFS program, the
total volume of renewable fuel produced and consumed in the United
States has grown substantially each year, primarily due to the
increased production and use of corn ethanol. However, the rate of
growth in the supply of ethanol has decreased in recent years as the
gasoline market has become saturated with E10, and efforts to expand
the use of higher ethanol blends such as E15 and E85 have not been
sufficient to maintain past growth rates in total ethanol supply. The
low number of retail stations selling these higher-level ethanol
blends, along with poor price advantages compared to E10, a limited
number of FFVs, and limited marketing of these fuels, among others,
represent challenges to the continued growth of the supply of ethanol
as a transportation fuel in the United States.
    In the 2014-2016 final rule we discussed in detail the factors that
constrain growth in ethanol supply and the opportunities that exist for
pushing the market to overcome those

constraints.\20\ That discussion generally remains relevant for 2017,
though we believe that the supply of ethanol can be somewhat higher in
2017 than it is expected to be in 2016.
---------------------------------------------------------------------------

    \20\ 80 FR 77456-77465.
---------------------------------------------------------------------------

    Ethanol supply is not currently limited by production and import
capacity, which is in excess of 15 billion gallons. Instead, the amount
of ethanol supplied is constrained by the following:
     Overall gasoline demand and the volume of ethanol that can
be blended into gasoline as E10 (the so-called E10 blendwall).
     The number of retail stations that offer higher ethanol
blends such as E15 and E85.
     The number of vehicles that can both legally and
practically consume E15 and/or E85.
     Relative pricing of E15 and E85 versus E10 and the ability
of RINs to affect this relative pricing.
     The demand for gasoline without ethanol (E0).

The applicable standards that we set under the RFS program provide
incentives for the market to overcome many of these ethanol-related
constraints. While the RFS program is unlikely to have a direct effect
on overall gasoline demand or the number of vehicles designed to use
higher ethanol blends, it can provide incentives for changes in the
number of retail stations that offer higher ethanol blends and the
relative pricing of those higher ethanol blends in comparison to E10.
The RFS program complements other efforts to increase the use of
renewable fuels, such as USDA's Biofuel Infrastructure Partnership
(BIP) program which has provided $100 million in grants for the
expansion of renewable fuel infrastructure in 2016 (supported by
additional State matching funds), and their Biorefinery Assistance
Program which has provided loan guarantees for the development and
construction of commercial-scale biorefineries with a number of the new
projects focused on producing fuels other than ethanol.
    However, as described in detail in the 2014-2016 final rule, the
RFS program is not unlimited in its ability to compel changes in the
market to accommodate greater supply of ethanol. For instance, while we
do believe that the number of retail stations offering E85 will expand
under the influence of the RFS program, an examination of efforts to
expand E85 offerings at retail in the past suggests that there are
limits in how quickly this can occur even under the most favorable
market conditions. While the average rate of expansion has recently
been about 120 new E85 stations per year, the growth in E85 stations
was more substantial in late 2010 and early 2011--equivalent to about
400 new stations per year. The more recent experience in particular
suggests that the growth in 2017 is unlikely to exceed several hundred
additional stations each year.21 22 Similarly, RIN prices
can continue to provide additional subsidies that help to reduce the
price of E85 relative to E10 at retail, but the propensity for retail
station owners and wholesalers to retain a substantial portion of the
RIN value substantially reduces the effectiveness of this aspect of the
RIN mechanism.\23\ Finally, in the 2014-2016 final rule we based the
2016 volume requirements in part on the expectation that the RFS
program would compel all but a tiny portion--estimated at 200 million
gallons--of gasoline to contain ethanol. At this time we do not believe
that the RFS program would provide incentives for this pool of E0 to
shrink further, as the demand for E0 by recreational marine engine
owners is often driven by concerns about potential water contamination
when E10 is used. (For further discussion of how the Agency arrived at
200 mill gal E0, see 80 FR 77464. We will continue to investigate
available sources to determine volumes of E0 in the gasoline market
both historically and projected out into the future for establishing
the standards under the RFS program, and we request comment on
forecasting future volumes of E0.)
---------------------------------------------------------------------------

    \21\ The impacts of the USDA BIP program were taken into
consideration in the 2014-2016 final rule. This program will phase-
in expanded retail offerings for E15 and E85 throughout 2016, and is
expected to be fully phased-in by 2017.
    \22\ See discussion at 80 FR 77460.
    \23\ See discussion at 80 FR 77458.
---------------------------------------------------------------------------

    We have also found that greater E85 price discounts relative to
gasoline have not been associated with the substantial increases in E85
sales volumes that some stakeholders believe have occurred, or could
occur in the near future. Based on an analysis of E85 consumption in
five states (including the frequently cited E85 consumption data from
Minnesota) and the E85 price reductions relative to gasoline in those
states, we estimate that increasing the national average E85 price
reduction relative to E10 from 17.5% to 30% would have increased total
2014 E85 consumption from 150 million gallons to only 200 million
gallons.\24\ Importantly, an increase in the nationwide average E85
price reduction to 30% would be unprecedented. A paper published by
Babcock and Pouliot estimated sales volumes of a similar magnitude for
these price reductions, projecting that consumers would consume about
250 million gallons of E85 if it was priced at parity on a cost-per-
mile basis with E10 (approximately 22% lower on a price-per gallon
basis).\25\ Based on our analysis of consumer response to E85 prices,
as supported by the Babcock and Pouliot analysis, it would be
inappropriate to estimate total potential E85 consumption based on the
consumption capacity of all FFVs, or even just those FFVs with
reasonable access to E85. It would be similarly inappropriate to assume
that the E85 throughput at a given retail station could be the same as
typical throughput rates for E10. Such estimates demonstrate what is
physically possible, not what is likely to occur given the way that the
market actually operates under the influence of high RIN prices.
---------------------------------------------------------------------------

    \24\ ``Correlating E85 consumption volumes with E85 price,''
memorandum from David Korotney to docket EPA-HQ-OAR-2015-0111.
    \25\ Babcock, Bruce and Sebastien Pouliot. How Much Ethanol Can
Be Consumed in E85? Card Policy Briefs, September 2015. 15-BP 54.
200 and 250 mill gal of E85 are of similar magnitude when compared
to the many billions of gallons of E85 that some parties have said
is possible.
---------------------------------------------------------------------------

    Another significant factor in estimating the total volume of
ethanol that can be supplied is the E10 blendwall, which is in turn a
function of total gasoline demand. While the E10 blendwall does not
represent a barrier to increasing ethanol supply, it does mark the
point at which additional ethanol supply becomes more challenging to
achieve. As the pool-wide ethanol concentration increases from 10% to
higher levels of ethanol, the market transitions from mild resistance
to obstacles that are more difficult to overcome, particularly with
regard to infrastructure and relative pricing for higher ethanol blends
such as E15 and E85. Because of this dynamic, it is helpful to identify
the total volume of ethanol that could be supplied if all gasoline was
E10 and there were no higher ethanol blends.
    Based on the April 2016 Short-Term Energy Outlook (STEO) from the
Energy Information Administration, total demand for gasoline energy in
2017 is projected to be 17.10 quadrillion Btu.\26\ If all of this
gasoline energy was consumed as E10, the total volume of gasoline would
be 142.0 billion gallons,

and the corresponding volume of ethanol consumed would be 14.2 billion
gallons. If we took into account the small volume of E0 that we believe
would continue to be supplied for use in recreational marine engines as
discussed in the 2014-2016 final rule, the total volume of ethanol used
as E10 would be slightly smaller at 14.18 billion gallons. By
comparison, the ethanol volume we estimated in the 2014-2016 final rule
to be associated with the E10 blendwall in 2016 was 14.0 billion
gallons.\27\
---------------------------------------------------------------------------

    \26\ Derived from Table 4a of the STEO, converting consumed
gasoline and ethanol projected volumes into energy using conversion
factors supplied by EIA. http://www.eia.gov/forecasts/steo/archives/apr16.pdf. Excludes gasoline consumption in Alaska. For further
details, see ``Calculation of proposed % standards for 2017'' in
docket EPA-HQ-OAR-2016-0004.
    \27\ See Table II.E.2.i-1, 80 FR 77458.
---------------------------------------------------------------------------

    It is difficult to identify the precise boundary between ethanol
supply volumes that can be realistically achieved in 2017 and those
that likely cannot realistically be achieved in that timeframe.
Nevertheless, we believe that ongoing efforts to increase the
availability of E15 and E85 at retail will create opportunities for
greater supply of ethanol in 2017 in comparison to 2016.
    In the 2014-2016 final rule, we projected that ethanol supply in
2016 could exceed that supplied in 2015 by about 170 million gallons
based on changes in gasoline demand, the influence of programs such as
USDA's BIP program, and our expectation for how the RFS standards we
set would influence sales of E0, E15, and E85 between the two years.
For 2017, we believe that slightly larger increases in ethanol supply
are possible. For the purpose of assessing the supply of total
renewable fuel to require in 2017, we are proposing to use an ethanol
supply of 14.4 billion gallons for 2017. While the market will
ultimately determine the extent to which compliance with the annual
standards is achieved through the use of greater volumes of ethanol
versus other, non-ethanol renewable fuels, we nevertheless believe that
this ethanol volume represents a realistically achievable level that
takes into account the ability of the market to respond to the
standards we set. We request comment on whether 14.4 billion gallons of
ethanol is an appropriate volume to use in the determination of the
applicable total renewable fuel volume requirement for 2017. For the
final rule, we will consider comments received in response to this
proposal, additional data and information that has become available,
and more up-to-date projections of gasoline demand in estimating the
total volume of ethanol that can be supplied.
2. Biodiesel and Renewable Diesel
    While the market constraints on ethanol supply are readily
identifiable as being primarily in the areas of refueling
infrastructure and ethanol consumption, it is more difficult to
identify and assess the market components that may limit potential
growth in the use of biodiesel in 2017. Nevertheless, as discussed in
the final rule establishing the RFS standards for 2014-2016, there are
several factors that may, to varying degrees and at different times
limit the growth of biodiesel and renewable diesel in future years,
including local feedstock availability, production and import capacity,
and the capacity to distribute, sell, and consume increasing volumes of
biodiesel and renewable diesel. We continue to believe that the supply
of biodiesel and renewable diesel as transportation fuel in the United
States, while growing, is not without limit in the near term.
    In the 2014-2016 rule we discussed the current status of each of
the factors that impacts the supply of biodiesel and renewable diesel
used as transportation fuel in the United States. While the market for
biodiesel and renewable diesel has continued to develop, little has
changed that would significantly impact our assessment of these
factors. Instead, we expect that the growth in the supply of biodiesel
and renewable diesel will largely be driven by incremental developments
across the marketplace in 2017 to steadily increase volumes. For the
purpose of deriving our proposed volumes for advanced biofuel and total
renewable fuel we have projected that 2.7 billion gallons of biodiesel
and renewable diesel (including both advanced and conventional biofuel)
can be supplied in 2017, up from the 2.5 billion gallons that was
projected for 2016. This volume exceeds the previously established BBD
volume requirement of 2.0 billion gallons in 2017, as we believe
additional volumes of both conventional and advanced biodiesel and
renewable diesel can be supplied to the United States in 2017 (see
Section IV for further discussion of the BBD standard). The following
sections discuss our expectations for developments in key areas
affecting the supply of biodiesel and renewable diesel in 2017. For a
more detailed discussion of each of these factors, see the discussion
in the 2014-2016 final rule.\28\ We request comment on the projected
available supply of biodiesel and renewable diesel in 2017, as well as
the degree to which each of the factors discussed below may impact the
available supply.
---------------------------------------------------------------------------

    \28\ 80 FR 77465.
---------------------------------------------------------------------------

i. Feedstock Availability
    In previous years, the primary feedstocks used to produce biodiesel
and renewable diesel in the United States have been vegetable oils
(primarily soy, corn, and canola oils) and waste fats, oils, and
greases. We anticipate that these feedstocks will continue to be the
primary feedstocks used to produce biodiesel and renewable diesel in
2017. Supplies of these oils are expected to increase slowly over time,
as oilseed crop yields increase and an increasing portion of waste oils
are recovered. While some have suggested that industries that compete
with the biodiesel and renewable diesel industry for vegetable oil
feedstocks will turn to alternative feedstock sources, resulting in
greater feedstock availability for biodiesel and renewable diesel
producers, such a shift in renewable oil feedstock use would not result
in an increase in the total available supply of renewable oil
feedstocks, and would therefore not alter the fundamental feedstock
supply dynamics for biodiesel and renewable diesel production.
    We anticipate that there will be a modest increase in the available
supply of feedstocks that can be used to produce biodiesel and
renewable diesel in 2017. Oil crop yield increases over the next few
years are expected to be modest, and significant increases in the
planted acres of oil crops are expected to be limited by competition
for arable land from other higher value crops. The recovery of corn oil
from distillers grains and the recovery of waste oils are already
widespread practices, limiting the potential for growth from these
sectors. Based on currently available information, we do not believe
that it is likely that the availability of feedstocks will
significantly limit the supply of biodiesel and renewable diesel used
for transportation fuel in the United States in 2017, as other factors
that impact the available supply (discussed below) are likely to
present greater challenges. However, it is possible that biodiesel
production at some individual facilities, especially those built to
take advantage of low-cost, locally available feedstocks, may be
limited by their access to affordable feedstocks in 2017, rather than
their facility capacity. Large increases in the available supply of
biodiesel and renewable diesel in future years will likely depend on
the development and use of new, high-yielding feedstocks, such as algal
oils or alternative oilseed crops.

ii. Biodiesel and Renewable Diesel Production Capacity
    The capacity for all registered biodiesel production facilities is
currently at least 2.7 billion gallons. The capacity for all registered
renewable diesel production facilities is more than 0.6 billion
gallons. Active production capacity is lower, however, as many
registered facilities were idle in 2015. Additionally, as discussed
above, the availability of economically viable feedstocks may limit
biodiesel production at any given facility to a volume lower than the
facility capacity.\29\ As with feedstock availability, we do not expect
that production capacity at registered facilities will limit the supply
of biodiesel for use as transportation fuel in the United States in
2017, however the supply of renewable diesel may be limited by the
production capacity at registered facilities. Renewable diesel
production facilities require significant investment and time to build,
and it is not likely that the capacity of registered renewable diesel
production facilities will increase sufficiently in time to have a
significant impact on the supply of renewable diesel to the United
States in 2017. It is likely that the addition of new production
capacity will be required in future years if the supply of renewable
diesel is to continue to increase.
---------------------------------------------------------------------------

    \29\ Due to the relatively low capital cost of biodiesel
production facilities, many facilities were built with excess
production capacity that has never been used.
---------------------------------------------------------------------------

iii. Biodiesel and Renewable Diesel Import Capacity
    Another important market component in assessing biodiesel and
renewable diesel supply is the potential for imported volumes and the
diversion of biodiesel and renewable diesel exports to domestic uses.
In addition to the approximately 560 million gallons imported into the
U.S. in 2015, there were about 90 million gallons exported from the
United States to overseas markets. Given the right incentives, it might
be possible to redirect a portion of the biodiesel consumed in foreign
countries to use in the U.S. in 2017. However, the amount of biodiesel
and renewable diesel that can be imported into the United States is
difficult to predict, as the incentives to import biodiesel and
renewable diesel to the U.S. are a function not only of the RFS and
other U.S. policies and economic drivers, but also those in the other
countries around the world. These policies and economic drivers are not
fixed, and change on a continuing basis. Over the years there has been
significant variation in both the imports and exports of biodiesel and
renewable diesel as a result of varying policies and relative economic
policies (See Figure II.C.2.iii-1 below). Increasing net imports
significantly would require a clear signal that increasing imports was
economically advantageous, potential re-negotiations of existing
contracts, and upgrades and expansions at U.S. import terminals.
Because of demand for biodiesel and renewable diesel in other countries
and potential biodiesel distribution constraints in the United States
(discussed below), we do not expect a dramatic increase in the net
imports of biodiesel and renewable diesel (total biodiesel and
renewable diesel imports minus exports) in 2017, but rather a moderate
increase, consistent with the general trend observed in previous years.
[GRAPHIC] [TIFF OMITTED] TP31MY16.004

iv. Biodiesel and Renewable Diesel Distribution Capacity
    While biodiesel and renewable diesel are similar in that they are
both diesel fuel replacements produced from the same types of
feedstocks, there are significant differences in their fuel properties
that result in differences in the way the two fuels are distributed and
consumed. Biodiesel is an oxygenated fuel rather than a pure
hydrocarbon. It cannot currently be

distributed through most pipelines due to contamination concerns with
jet fuel, and often requires specialized storage facilities to prevent
the fuel from gelling in cold temperatures. A number of studies have
investigated the impacts of cold temperatures on storage, blending,
distribution, and use of biodiesel, along with potential mitigation
strategies.30 31 32 Information provided by the National
Biodiesel Board indicates that some retailers offer biodiesel blend
levels that differ in the summer and winter to account for these cold
temperature impacts.\33\
---------------------------------------------------------------------------

    \30\ ``Biodiesel Cloud Point and Cold Weather Issues,'' NC State
University & A&T State University Cooperative Extension, December 9,
2010.
    \31\ ``Biodiesel Cold Weather Blending Study,'' Cold Flow
Blending Consortium.
    \32\ ``Petroleum Diesel Fuel and Biodiesel Technical Cold
Weather Issues,'' Minnesota Department of Agriculture, Report to
Legislature, February 15, 2009.
    \33\ http://biodiesel.org/using-biodiesel/finding-biodiesel/retail-locations/biodiesel-retailer-listings.
---------------------------------------------------------------------------

    The infrastructure needed to store and distribute biodiesel has
generally been built in line with the local demand for biodiesel. In
most cases the infrastructure must be expanded to bring biodiesel to
new markets, and additional infrastructure may also be needed to
increase the supply of biodiesel in markets where it is already being
sold. Renewable diesel, in contrast, is a pure hydrocarbon fuel that is
nearly indistinguishable from petroleum-based diesel. As a result,
there are fewer constraints on its growth with respect to distribution
capacity.
    Another factor potentially constraining the supply of biodiesel is
the number of terminals and bulk plants that currently distribute
biodiesel. At present there are about 600 distribution facilities
reported as selling biodiesel either in pure form or blended form, the
majority of which are bulk plants.34 35 These 600 facilities
are still a relatively small subset of the 1400 terminals and thousands
of additional bulk plants nationwide.\36\ This small subset appears to
be concentrated in the Midwest and most of the population centers of
the country, resulting in relatively few biodiesel distribution points
to provide biodiesel and biodiesel blends to a large portion of the
diesel fuel retailers in the United States. As a result, for the market
to continue to expand, it will likely require greater investment per
volume of biodiesel supplied, as the new biodiesel distribution
facilities will generally have access to smaller markets than the
existing facilities, or will face competition as they seek to expand
into areas already supplied by existing distribution facilities.
Transportation of the biodiesel to and from the terminals and bulk
plants must also be addressed, as biodiesel and biodiesel blends are
precluded from being transported in common carrier pipelines. Instead,
biodiesel must be transported by rail (where infrastructure permits) or
truck. Either of these options results in high fuel transportation
costs (relative to petroleum derived diesel, which is generally
delivered to terminals via pipelines), which may impact the viability
of adding biodiesel distribution capacity at a number of existing
terminals or bulk plants.
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    \34\ List of biodiesel distributers from Biodiesel.org Web site
(http://biodiesel.org/using-biodiesel/finding-biodiesel/locate-distributors-in-the-us/distributors-map). Accessed 10/8/15.
    \35\ Bulk plants are much smaller than major gasoline and diesel
distribution terminals, and generally receive diesel and biodiesel
shipped by trucks from major terminals.
    \36\ Number of terminals from the American Fuel and
Petrochemical Manufacturer's (AFPM) Web site, ``AFPM Industry 101,
Fuels Facts'', (http://education.afpm.org/refining/fuels-facts/).
Accessed 10/28/15.
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    The net result is that the expansion of terminals and bulk plants
selling biodiesel and biodiesel blends, and the distribution
infrastructure necessary to store and transport biodiesel to and from
these facilities, is a significant challenge we believe will limit the
potential for the rapid expansion of the biodiesel supply. This is an
area in which the biodiesel industry has made steady progress over
time, and we anticipate that this progress can and will continue into
the future, particularly with the ongoing incentive for biodiesel
growth provided by the RFS standards. Low oil prices, however, present
a challenge to the expansion of biodiesel distribution infrastructure,
since such projects generally have long payback timelines and parties
may be hesitant to invest in new infrastructure to enable additional
biodiesel distribution at a time when diesel prices are low. As with
many of these potential supply constraints, increasing biodiesel
storage and distribution capacity will require time and investment,
limiting the potential growth in 2017.
v. Biodiesel and Renewable Diesel Retail Infrastructure Capacity
    For renewable diesel, we do not expect that refueling
infrastructure (e.g., refueling stations selling biodiesel blends) will
be a significant limiting factor in 2017 due to its similarity to
petroleum-based diesel and the relatively small volumes expected to be
supplied in the United States. The situation is different, however, for
biodiesel. Biodiesel is typically distributed in blended form with
diesel fuel as blends varying from B2 up to B20. Biodiesel blends up to
and including B20 can be sold using existing retail infrastructure, and
generally does not require any upgrades or modifications at the retail
level. Retailers of diesel fuel, however, generally have only a single
storage tank for diesel fuel. They can therefore generally only offer a
single biodiesel blend. We expect that many of the retailers in this
situation will be hesitant to offer biodiesel blends above B5, as doing
so would mean only selling a fuel that would potentially void the
warranty of many of their customers' engines if used (see following
section for a further discussion of engine warranty issues). As
discussed in the next section, biodiesel blends up to 5% may be legally
sold as diesel fuel without the need for special labeling, and are
approved for use in virtually all diesel engines. Because biodiesel
blends up to B5 can be used in virtually all diesel engines and require
no specialized infrastructure at refueling stations, expanding the
number of refueling stations offering biodiesel blends is therefore
constrained less by resistance from the retail facilities themselves,
and more by the lack of nearby wholesale distribution networks that can
provide the biodiesel blends to retail. As discussed in the previous
section, we expect this expansion will continue at a steady pace in
2017.
vi. Biodiesel and Renewable Diesel Consumption Capacity
    Virtually all diesel vehicles and engines now in the in-use fleet
have been warranted for the use of B5 blends. Both the Federal Trade
Commission (FTC) and ASTM International (ASTM) specification for diesel
fuel (16 CFR part 306 and ASTM D975 respectively) allows for biodiesel
concentrations of up to five volume percent (B5) to be sold as diesel
fuel, with no separate labeling required at the pump. Biodiesel blends
of up to 5% are therefore indistinguishable in this regard. Using
biodiesel blends above B5 in diesel engines may, however, require
changes in design, calibration, and/or maintenance practices.\37\
According to NBB, approximately 80% of all diesel engine manufacturers
now warrant at least one of their current offerings for use with B20
blends. This is a potentially significant factor in assessing the
potential supply of biodiesel to vehicles in future years and has been
a main focus of NBB's

technical and outreach efforts for many years.
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    \37\ The vast majority of diesel fuel in the U.S. is consumed by
heavy-duty vehicles and nonroad diesel engines. Only a very minor
portion is consumed by light-duty diesel passenger vehicles.
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    Given the long life of diesel engines and the number of new engines
not warranted for biodiesel blends above B5, turning over a significant
portion of the fleet to engines designed and warranted for B20 is still
many years off into the future. As of 2015, EPA estimates that nearly
one third of the heavy duty diesel vehicles on the road were at least
15 years old, and that approximately 7 percent were at least 25 years
old. The relatively large number of older diesel engines in the fleet,
the significant number of new engines that are not warranted to use
biodiesel blends above B5, and the fact that most diesel fuel retailers
sell only a single blend of biodiesel (discussed above), means that in
the near term the opportunity to sell B20 exclusively to vehicles
designed and warranted to run on these blends will likely be limited to
centrally-fueled fleets or retailers large enough to offer multiple
biodiesel blend levels.\38\
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    \38\ Although as stated above, some public retailers are
choosing to sell only B11 or B20 blends and allowing the consumer
the option of either going elsewhere or purchasing fuel for which
their engines are not warranted.
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    We believe it is likely that in 2017 it will become increasingly
necessary to sell higher-level biodiesel blends, greater quantities of
renewable diesel, or additional volumes of biodiesel in qualifying
nonroad applications to increase the total supply of biodiesel and
renewable diesel. If the diesel pool contained 5% biodiesel nationwide,
consumption of biodiesel would reach approximately 2.9 billion gallons
in 2017. Alternatively, assuming the availability of approximately 500
million gallons of renewable diesel in 2017 (approximately a 100
million gallon increase from 2015) and the use of 100 million gallons
of biodiesel in qualifying nonroad uses, approximately 73% of the
highway diesel pool in 2017 would have to be sold as a B5 blend to
achieve the total projected supply of biodiesel and renewable diesel of
2.7 billion gallons in 2017. Alternatively, selling appreciable volumes
of biodiesel blends above B5 would mean that a smaller percentage of
the diesel pool would have to contain biodiesel to achieve the proposed
standards. While we believe that achieving these blend levels
nationwide is possible in 2017, it will require significant effort and
investment in the distribution infrastructure for biodiesel. Biodiesel
consumption capacity in areas that currently have access to biodiesel
blends is one of the factors likely to slow the growth of the supply of
biodiesel and renewable diesel in 2017 and in future years.
vii. Biodiesel and Renewable Diesel Consumer Response
    Consumer response to the availability of renewable diesel and low-
level biodiesel blends (B5 or less) has been generally positive, and
this does not appear to be a significant impediment to growth in
biodiesel and renewable diesel use. Because of its similarity to
petroleum diesel, consumers who purchase renewable diesel are unlikely
to notice any difference between renewable diesel and petroleum-derived
diesel fuel. Similarly, biodiesel blends up to B5 are unlikely to be
noticed by consumers, especially since, as mentioned above, they may be
sold without specific labeling. Consumer response to biodiesel blends
is also likely aided by the fact that despite biodiesel having roughly
10 percent less energy content than diesel fuel, when blended at 5
percent the fuel economy impact of B5 relative to petroleum-derived
diesel is a decrease of only 0.5%, an imperceptible difference.
Consumer response has been further aided by the lower prices that many
wholesalers and retailers have been willing to provide to the consumers
for the use of biodiesel blends. The economic incentives provided by
the biodiesel blenders tax credit and the RIN have made it possible for
some retailers to realize additional profits while selling biodiesel
blends, while in many cases offering these blends at a lower price per
gallon than diesel fuel that has not been blended with biodiesel. The
ability for retailers to offer biodiesel blends at competitive prices
relative to diesel that does not contain biodiesel, even at times when
oil prices are low, is a key factor in the consumer acceptance of
biodiesel and renewable diesel.
viii. Projected Supply of Biodiesel and Renewable Diesel in 2017
    Due to the large number of market segments where actions and
investments may be needed to support the continued growth of biodiesel
blends, it is difficult to isolate the specific constraint or group of
constraints that would be the limiting factor or factors to the supply
of biodiesel and renewable diesel in the United States in 2017. Not
only are many of the potential constraints inter-related, but they are
likely to vary over time. The challenges in identifying a single factor
limiting the growth in the supply of biodiesel and renewable diesel in
2017 does not mean, however, that there are no constraints to the
growth in supply.
    A starting point in developing a projection of the available supply
of biodiesel and renewable diesel in 2017 is a review of the volumes of
these fuels supplied for RFS compliance in previous years. In examining
the data, both the absolute volumes of the supply of biodiesel and
renewable diesel in previous years, as well as the rates of growth