[Federal Register Volume 77, Number 228 (Tuesday, November 27, 2012)]
[Notices]
[Pages 70752-70776]
[FR Doc No: 2012-28586]

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ENVIRONMENTAL PROTECTION AGENCY

[FRL-9754-4]

Notice of Decision Regarding Requests for a Waiver of the
Renewable Fuel Standard

AGENCY: Environmental Protection Agency (EPA).

ACTION: Notice.

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SUMMARY: The Governors of several States requested that EPA waive the
national volume requirements for the renewable fuel standard program
(RFS or RFS program), pursuant to section 211(o)(7) of the Clean Air
Act (the Act), based on the effects of the drought on feedstocks used
to produce renewable fuel in 2012-2013. Several other parties submitted
similar requests. Based on a thorough review of the record in this
case, EPA finds that the evidence and information does not support a
determination that implementation of the RFS program during the 2012-
2013 time period would severely harm the economy of a State, a region,
or the United States. EPA is therefore denying the requests for a
waiver.

DATES: Petitions for review must be filed by January 28, 2013.

ADDRESSES: EPA has established a docket for this action under Docket ID
No. EPA-HQ-OAR-2012-0632. All documents and public comment in the
docket are listed on the www.regulations.gov Web site. Publicly
available docket materials are available either electronically through
www.regulations.gov or in hard copy at the Air and Radiation Docket in
EPA Headquarters Library, EPA West Building, Room 3334, 1301
Constitution Ave. NW., Washington, DC. The Public Reading Room is open
from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal
holidays. The telephone number for the Reading Room is<PHONE_NUMBER>.
The Air and Radiation Docket and Information Center's Web site is
http://www.epa.gov/oar/docket.html. The electronic mail (email) address
for the Air and Radiation Docket is<EMAIL_ADDRESS>the
telephone number is<PHONE_NUMBER>, and the Fax number is (202) 566-
9744.

FOR FURTHER INFORMATION CONTACT: Dallas Burkholder, Office of
Transportation and Air Quality, Environmental Protection Agency,
National Vehicle and Fuel Emissions Laboratory, 2565 Plymouth Road, MI
48105; telephone number:<PHONE_NUMBER>; fax number (734) (214-4050;
email address<EMAIL_ADDRESS>

SUPPLEMENTARY INFORMATION:

I. Executive Summary

    Governors from several States have requested a waiver of the
national volume requirements for the renewable fuel standard program
(RFS or RFS program). Broadly summarized, the States requesting a
waiver (requesting States) assert that the RFS program is having a
negative impact on their respective State economies based on this
period of severe drought conditions by diverting corn from other
markets to production of ethanol to meet volumes required under the
RFS, leading to increased corn prices and resultant negative impacts on
the livestock industry and food prices. Other parties requested a
waiver on similar grounds. On August 30, 2012, EPA published a Federal
Register notice inviting public comment on the waiver requests and
other matters relevant to EPA's consideration of those requests.
    In determining whether these waiver requests should be granted or
denied, our decision is based on the relevant criteria for a waiver set
forth in CAA Section 211(o)(7)--whether implementation of the RFS
volume requirements would severely harm the economy of a State, a
region or the United States. In making its determination, EPA took into
consideration all comments submitted as well as an analysis of relevant
impacts of the drought on the crops that would be used as feedstock in
the production of renewable fuel during the 2012/2013 corn marketing
year (September 2012 through August 2013). EPA analyzed the impacts
with and without a waiver, utilizing an updated version of an Iowa
State University (ISU) model that was used in response to a Texas
waiver request in 2008 (discussed further below) when analyzing this
year's waiver requests. This analysis identified the extent to which,
if any, implementation of the RFS volume requirements would affect
ethanol production and thereby the price of corn and other products
over the relevant time period. EPA also considered other empirical data
including historical and current Renewable Identification Number (RIN)
credit prices and the available quantity of carryover RINs.\1\
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    \1\ A RIN is unique number generated by the producer and
assigned to each gallon of a qualifying renewable fuel under the RFS
program, and is used by refiners and importers to demonstrate
compliance with the volume requirements under the program.
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    After weighing all of the evidence before it, EPA found that the
evidence does not support a determination that implementation of the
RFS over the time period in question would severely harm the economy of
a State, region, or the United States, the high statutory threshold for
a waiver. The body of information shows that it is very likely that the
RFS volume requirements will have no impact on ethanol production
volumes in the relevant time frame, and therefore will have no impact
on corn, food, or fuel prices. In addition, the body of the evidence
also indicates that even in the unlikely event that the RFS mandate
would have an impact on the corn and other markets during the 2012-2013
time frame, its nature and magnitude would not be characterized as
severe. In the small percentage of modeled scenarios where a waiver of
the RFS mandate would have any impact on the production of ethanol (11
percent of the cases), the decrease in ethanol production is small and
the resulting reduction in corn prices is projected to be limited (on
average $0.58 per bushel of corn).\2\ These potential impacts from
implementation of the RFS program would not be considered as meeting
the high statutory threshold of severe harm to the economy set by the
statute. It is worth emphasizing that the modeling shows that even this
degree of impact is a very unlikely outcome. The most likely outcome is
that implementation of the RFS program during this time frame would
have no impact at all on ethanol production and corn prices.
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    \2\ On average, across the 500 cases considered in the ISU
analysis, a small $0.07 cent per bushel reduction on corn prices
would be expected in the case of a waiver.
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    EPA also received comment on issues related to, among other topics,
the general impact of increased use of biofuels on the economy and
global markets, on ethanol's characteristics as a transportation fuel,
and on the RFS program in general. EPA recognizes that many parties,
both those supporting the waiver and those opposing the waiver, have
raised issues of significant concern to them and to others in the
nation concerning the role of renewable fuels and the RFS program in
our country. In particular, EPA recognizes comments that focus on the
severity of the drought and its major impacts on multiple sectors
across the country. Many commenters describe the dire economic impact
that this year's drought has had on corn crops, corn prices and those
industries that rely on corn as an input. EPA and its federal partners
recognize the substantial negative economic impacts suffered as a
result of this year's historic drought. The drought's impact on U.S
corn and other crop production has been well documented and was
reflected in increasing corn prices starting early this summer.\3\ Crop
growing regions across the country were affected, and the impacts of
reduced crop production are far-reaching.
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    \3\ See for example the World Agricultural Supply and Demand
Estimates, select issues, prepared by the U.S. Department of
Agriculture; http://www.usda.gov/oce/commodity/wasde.
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    However, as was the case in 2008, the issue directly before the
Agency is limited given EPA's authority under section 211(o)(7)(A) of
the Act. After considering all of the public comments, both those in
support of a waiver and those against, and consulting with the
Secretaries of Agriculture and Energy, EPA has determined that the
waiver requests should be denied because the evidence does not support
making a determination that implementation of the RFS volume
requirements during this time period would severely harm the economy of
a State, region, or the United States.
    It is important to note that this and other waiver decisions are
based on current circumstances and market conditions. As indicated by
EPA's modeling, the impact of the RFS volume requirements is highly
dependent on the volumes at issue, the number of RINs carried over from
prior years and the relevant market commodity prices, such as corn and
crude oil prices, and other factors applicable during the time period
analyzed.

II. Overview of the Renewable Fuel Standard (RFS) Program

    The Energy Policy Act of 2005 (EPAct) amended the Clean Air Act to
establish a Renewable Fuel Standard (RFS) Program and gave EPA
responsibility for implementing it. EPAct required EPA to issue
regulations ensuring that gasoline sold in the U.S., on an annual
average basis, contained a specified volume of ``renewable fuel.'' The
Energy Independence and Security Act of 2007 (EISA) amended the RFS
program by, among other things, extending the program to cover
transportation fuel, not just gasoline, extending the years in which
Congress specified the required volume of renewable fuels by ten years,
and increasing the required volumes of renewable fuels. EISA set the
2012 and 2013 RFS renewable fuel mandates as 15.2 billion gallons and
16.55 billion gallons respectively, and the mandate rises to 36.0
billion gallons by 2022. EISA also imposed additional requirements for
the use of advanced biofuel, biomass-based diesel, and cellulosic
biofuel, included within the

overall mandate of renewable fuel. As part of EISA, Congress required
EPA to determine the life-cycle emissions of greenhouse gases
associated with renewable fuels, and required a minimum level of
greenhouse gas reduction to qualify as renewable fuel, advanced
biofuel, cellulosic biofuel or biomass-based diesel. EPAct had the
statutory goal of increasing the volume of renewable fuels that are
required to be used in the transportation sector and Congress furthered
that goal with the passage of EISA. In this context, implementation of
EISA is aimed at reducing dependence on foreign sources of energy,
increasing the domestic supply of energy, and reducing greenhouse gas
emissions associated with the transportation sector.
    EPA published regulations for the RFS program as amended by EISA on
March 26, 2010 (75 FR 14670), and the amended RFS program became
effective starting July 1, 2010. Since that time more than 36 billion
ethanol-equivalent gallons of renewable fuel have been produced under
the RFS program.\4\ EPA has also continued to update the RFS
regulations through rulemaking actions to establish specific required
renewable fuel volumes and annual percentage standards, as well as to
identify additional qualifying renewable fuel production pathways. New
pathways to produce renewable fuel for the RFS program, such as
biomass-based diesel produced from canola oil have been approved as
qualifying renewable fuels under RFS, and several others, such as
ethanol produced from grain sorghum, are currently under evaluation. As
new biofuel, feedstock, and fuel production technologies approach
commercialization EPA will continue to review potential renewable fuel
pathways for inclusion in the RFS program.\5\
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    \4\ Data from EPA's Moderated Transaction System (EMTS) through
September 2012. Retrieved November 8, 2012 from EMTS. See ``RIN
Rollover'' memo in the docket for more information or http://www.epa.gov/otaq/fuels/rfsdata/index.htm.
    \5\ A renewable fuel ``pathway'' under the RFS program
encompasses a feedstock, process, and fuel combination. For example,
ethanol (fuel) produced through a dry-mill process (process) and
derived from corn starch (feedstock).
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    In April 2008, EPA received a request from the Governor of the
State of Texas for a fifty percent waiver of the national volume
requirements for the RFS; we provide more detail on this request here
due to the relevance of our response to that request to today's
determination. Texas based its request on the assertion that the RFS
mandate was having a negative impact on the economy of Texas,
specifically in the form of increased corn prices negatively impacting
the livestock industry and food prices. After considering all of the
public comments, and consulting with the Secretaries of Agriculture and
Energy, EPA denied the waiver request.\6\ In making this decision, and
as discussed in more detail below, EPA interpreted the statutory
provisions to require a determination based on the expected impact of
the RFS program itself, a generally high degree of confidence that
implementation of the RFS program would severely harm the economy of a
State, region, or the United States, and a high threshold for the
nature and degree of harm. After weighing all of the evidence before
it, EPA determined that the evidence in 2008 did not support a finding
that implementation of the RFS would severely harm the economy of a
State, region, or the United States. First, the evidence indicated that
the most likely result was that the RFS would have no impact on ethanol
production volumes in the relevant time frame, and therefore no impact
on corn, feed, food, or fuel prices. Second, EPA also determined that
if the RFS volume requirements were to have an impact on the economy
during the 2008/2009 corn marketing year, it would not be of the nature
or magnitude that could be characterized as severe. As part of the
determination, EPA also provided guidance on what types of information
should be submitted in the case of future waiver requests under the
same provision of the Act.
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    \6\ 73 FR 47168 (August 13, 2008).
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III. EPA's Administrative Process

    In this section we first provide background information concerning
the waiver requests and EPA's public notice of, and solicitation of
comment on those requests. We also address comments related to
procedural issues concerning our consideration of the waiver requests.

1. Letters Seeking an RFS Waiver and EPA's Request for Comment

    Beginning in July 2012, EPA received a number of requests for it to
exercise its authority under CAA 211(o)(7) to grant a waiver in whole
or in part of the renewable fuel standard requirements. In addition,
EPA received a number of petitions seeking the same or similar EPA
action from a number of state Governors, including the Governors of
Arkansas, North Carolina, New Mexico, Georgia, Texas, Virginia,
Maryland, Delaware, Utah, and Wyoming. The Governor of Florida wrote in
support of a waiver in an October 16, 2012 letter to the
EPA.7 8 9
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    \7\ See, for example, the July 30, 2012 letter submitted by the
National Pork Producers Council (NPPC), on behalf of several
national regional livestock, poultry, and other organizations
(``July 30 NPPC letter'') requesting a waiver, EPA-HQ-OAR-2012-0632-
0012.
    \8\ The Governors' letters requesting a waiver are available at
docket number EPA-HQ-OAR-2012-0632.
    \9\ In an August 9, 2012 letter, the Governors of Delaware and
Maryland jointly wrote in support of the July 30 NPPC letter. The
Governor of Delaware subsequently wrote in a September 25 letter
asking that the August 9 letter ``be formally considered a Petition
for Waiver;'' mentioned in EPA-HQ-OAR-2012-0632-1969. The Governor
of Maryland also submitted a subsequent letter dated October 11,
2012 requesting a waiver, EPA-HQ-OAR-2012-0632-2259.
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    All of the letters from State Governors discussed above, as well as
the many letters EPA received supporting the waiver requests or asking
EPA to waive the RFS volume requirements, cite the negative impact of
this year's severe drought conditions, and most discuss the effect the
drought has had on corn and feed prices, and the subsequent impacts
being felt by the livestock, poultry, and other sectors.\10\ Several of
the letters claim that the RFS program significantly increases demand
for corn, thereby increasing corn prices and harming those sectors that
use corn as a production input, such as the livestock and poultry
industries. Many of the letters claim that a waiver of the RFS volume
requirements would alleviate some of that harm. Though not all of the
letters specify a time period for the waiver, many of them request a
waiver of the RFS volume requirements in 2012 and 2013. While the
contents of the letters described above vary in detail, each letter
either requests that the Administrator grant a waiver of required RFS
volumes or expresses support for the granting of such a waiver.
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    \10\ This includes several letters EPA received from Members of
Congress supporting a waiver, all of which are available in the
docket.
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    On August 30, 2012, EPA published a Federal Register Notice
providing notice of its receipt of the waiver petitions, letters of
support for the waiver petitions, and requests that EPA grant a waiver
and invited public input on those requests over a 30-day comment
period.\11\ EPA stated in the Notice that any similar requests received
by EPA after issuance of the Notice would be docketed and considered
together with the requests already received (collectively, the ``waiver
requests'').
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    \11\ 77 FR 52715 (August 30, 2012) (``August 30 Notice'').
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    EPA requested comment from the public on any matter that might be

relevant to EPA's review of and actions in response to the waiver
requests, including but not limited to: (a) Whether compliance with the
RFS would severely harm the economy of Arkansas, North Carolina, other
States, a region, or the United States; (b) whether the relief
requested will remedy the harm; (c) to what extent, if any, a waiver
would change demand for ethanol and affect prices of corn, other
feedstocks, feed, and food; (d) the amount of ethanol that is likely to
be consumed in the U.S. during the relevant time period, based on its
value to refiners for octane and other characteristics and other market
conditions in the absence of the RFS volume requirements; and (e) if a
waiver were appropriate, the amount of renewable fuel volume
appropriate to waive, the date on which any waiver should commence and
end, and to which compliance years it should apply.
    In response to requests for an extension of time for public
comment, EPA extended the public comment period by 15 days to October
11, 2012.\12\ EPA received in excess of 29,000 comments during the
comment period; the majority of the comments were short statements
generally in support of the requests for a waiver. EPA also received
numerous comments from various trade organizations and businesses,
Governors, Members of Congress and other elected officials,
researchers, and environmental organizations either supporting or
opposing a waiver. Many of the comments referenced various analyses
which are discussed below. In addition, EPA received comments that
either supported EPA's legal interpretation of section 211(o)(7) as
described in the 2008 Texas waiver determination or suggested that
different interpretations and applications were appropriate. EPA
addresses these and other comments either in the discussion of our
process, results and conclusions, or in section VI of this
determination.
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    \12\ 77 FR 57566 (September 18, 2012).
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2. EPA's Treatment of Petitions for a Waiver, Letters in Support of
Petitions for a Waiver, Letters Requesting That EPA Act on its Own
Authority To Issue a Waiver

    Section 211(o)(7)(A) states, in relevant part, that ``The
Administrator * * * may waive [the RFS requirements] in whole or in
part on petition by one or more States, by any person subject to the
requirements of this subsection, or by the Administrator on his own
motion * * * (i) based on a determination * * * that implementation of
the requirement would severely harm the economy or environment of a
State, a region or the United States, or (ii) based on a determination
* * * that there is an inadequate domestic supply.'' (Emphasis added).
The statutory criteria that must be met to issue a waiver are the same
regardless of whether EPA acts on its own motion or responds to a
petition from a State or person subject to the RFS requirements. The
only difference the statute draws between the Administrator acting on
her own motion or in response to a petition submitted by the listed
parties is the 90-day deadline for EPA action in the latter case, set
by section 211(o)(7)(B). Therefore, EPA has given all waiver requests,
whether received before or after the August 30 Notice, equal
consideration. For the reasons described below, EPA is denying all of
the waiver requests.
    EPA received comment that although EPA sought comment on all the
waiver requests, the Administrator need only decide that one of the
requests meets the statutory requirements of CAA section 211(o)(7) in
order to exercise her authority to waive the requirements of CAA
section 211(o)(2) in whole or in part. This commenter noted that while
EPA may consider the entirety of information and comments submitted on
the various waiver requests, it need not decide that all, or several,
of the requests have sufficient basis in order to grant a waiver. The
commenter suggests that the waiver provision requires the Administrator
to make individualized decisions with respect to ``a State,'' or ``a
region'' of the United States that may be the subject of an individual
request. EPA has considered all of the information and analysis
submitted by the petitioners and parties who requested a waiver, as
well as that submitted in comments. We have considered all information
before us, including an analysis developed by EPA, as discussed below.
Our technical analysis is relevant to all of the individual waiver
requests. Based on the entire record before it, EPA has determined that
each of the petitions and requests should be denied. In this decision
EPA addresses each of the requests and petitions it has received to
date. Therefore, EPA does not find itself in the situation posited by
the commenters where some of the individual petitions are determined to
satisfy the criteria for a waiver and other petitions do not. Rather,
EPA has determined that each of the petitions should be denied.

3. Other Comments Related to EPA's Administrative Process

    As mentioned above, as part of the 2008 waiver determination EPA
provided guidance on what types of information and analysis should be
submitted with future waiver requests. In response to this year's
August 30 Notice, commenters argued that such guidance effectively
established ``completeness criteria'' that petitioning States failed to
meet, and that EPA failed to apply when initially evaluating the
requesting letters.\13\ Commenters argue that had EPA applied such
criteria, EPA ``would not have even sought comment on the state
petitions submitted this year.'' \14\ Commenters further argued that
because the petitions submitted in 2012 fail to meet the criteria put
forth by EPA in 2008, EPA ``may not grant a waiver as the public has
been deprived of the opportunity to comment on the basis for granting a
waiver'' of the RFS.\15\
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    \13\ EPA-HQ-OAR-2012-0632-2357, EPA-HQ-OAR-2012-0632-2218.
    \14\ EPA-HQ-OAR-2012-0632-2218.
    \15\ EPA-HQ-OAR-2012-0632-2218.
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    EPA takes seriously its responsibility to evaluate whether
circumstances warranting a waiver have arisen. EPA also recognizes the
need to avoid the uncertainty to the renewable fuel and RIN markets
that may be associated with unnecessarily frequent evaluations of
whether issuing a waiver is appropriate. To help meet those objectives,
EPA provided guidance in 2008 regarding expectations for future waiver
requests, and today we repeat that such guidance should be followed in
the future. At the same time, we explicitly stated in 2008 that the
guidance provided ``is not a rule, and therefore is not binding on the
public or EPA. Any final decision on the sufficiency and merit of a
petition will be made upon review of a petition by EPA in consultation
with USDA and DOE.'' We further stated that EPA would ``review a
request for a waiver and first determine whether to proceed with public
notice and comment.''
    EPA, in consultation with USDA and DOE, reviewed the waiver
requests received in July and August. In light of the severe drought
affecting much of the country, and the clearly expressed support for a
waiver by a number of States, governmental representatives and industry
trade groups, it was clearly appropriate to seek public comment on the
requests before making a final decision. Such a step would be required
before EPA could make a decision to grant a waiver, and it was clearly
appropriate to do so in these circumstances involving severe drought

conditions before making a decision to either grant or deny a waiver.
The many important public submissions in response to EPA's solicitation
of comment have affirmed the importance of addressing the waiver issue
in a prompt and transparent fashion.

IV. Key Interpretive Issues

    Section 211(o)(7) of the CAA provides that EPA may waive the
mandated national RFS volume requirement in whole or in part based on a
determination by the Administrator that: (i) ``implementation of the
requirement would severely harm the economy or environment of a State,
a region, or the United States,'' or (ii) ``that there is an inadequate
domestic supply.'' The 2012 waiver requests are all based on claims of
severe economic harm to states, regions and/or the country as a whole
associated with implementation of the RFS requirements in light of the
drought experienced in large agricultural production areas of the
country this summer. Therefore, the relevant statutory provision
authorizes a waiver if EPA determines that RFS implementation ``would
severely harm the economy of a State, a region or the United States.''
    In the August 30 Notice, EPA sought public comment on its
interpretation of this provision as discussed in the context of the
2008 Texas waiver determination. EPA's responses to the comments
received are set forth in section VI of this determination. For reasons
more fully described in that section, EPA continues to interpret this
statutory provision as it did in 2008. Thus, it would not be sufficient
for EPA to determine that there is severe harm to the economy of a
State, region or the United States; rather, EPA must determine that RFS
implementation would severely harm the economy. Furthermore, EPA
interprets the word ``would'' as requiring a generally high degree of
confidence that implementation of the RFS program would severely harm
the economy of a State a region, or the United States. EPA interprets
``severely harm'' as specifying a high threshold for the nature and
degree of harm. Although there are many factors that affect an economy,
the RFS waiver provisions call for EPA to evaluate the impact of the
RFS mandate itself. EPA does not evaluate the impact of the RFS volume
requirements in isolation, but instead evaluates them in the context of
all of the relevant circumstances, including in this case the impact of
the drought. However the purpose of this analysis is to characterize
the impact of the RFS mandate itself, within this context. Finally,
because the statute specifies that EPA ``may'' grant a waiver if it
determines that implementation of the RFS requirements would severely
harm the economy of a State, a region or the United States, the statute
provides EPA with discretion to decline to issue a waiver even if it
finds that the severe harm test is satisfied. This discretion allows
EPA to take into consideration the possible impacts of issuing a waiver
that extend beyond the geographic confines of a particular State or
region. EPA believes that such consideration is particularly
appropriate in light of the statutory requirement that any RFS waiver
be nationwide in scope.\16\ To the extent relevant to the waiver
requests before it, EPA has applied this interpretation in reaching a
decision on the waiver requests.
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    \16\ Section 211(o)(7) reads, in relevant part, that the
``Administrator * * * may waive the [RFS] requirements * * * by
reducing the national quantity of renewable fuel * * *''. Emphasis
added.
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V. Technical Analysis

    To evaluate the impact that implementation of the RFS would have on
the amount of ethanol produced and consumed over the relevant time
period, and the resulting impacts, if any, on the agricultural and
other industries, we applied the same analytical framework EPA used in
evaluating the 2008 waiver request. We first assessed what impact
implementation of the RFS program would have on ethanol production and
consumption, and thus corn prices, by conducting our own analysis using
a model developed by Iowa State University. We then evaluated the
impacts such changes, if any, would have on a set of key factors,
including corn prices, feed prices, food prices, and fuel prices. A
number of commenters submitted analyses looking at similar issues, and
we reviewed those studies as part of our overall evaluation. Throughout
this section we also address various comments we received in response
to the August 30 Notice.

1. Methodology

(a) Analytical Model
    To assess the impact of implementation of the RFS, EPA evaluated
two scenarios: one in which no waiver is granted and another in which a
waiver of the total renewable fuel mandate is granted, as discussed
below. As we did in evaluating the 2008 Texas waiver request, EPA
utilized an economic model developed by researchers at Iowa State
University (ISU model). During development of the analytical framework
used in 2008, EPA evaluated different models and modeling approaches,
and we refer readers to that discussion for more detail.\17\
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    \17\ 73 FR 47173 (August 13, 2008).
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    EPA believes the ISU model continues to be the most appropriate
choice for a number of reasons. First, as discussed in 2008, EPA
believes it is critical to use a stochastic framework to capture a
range of potential outcomes, rather than a point estimate, given
potential variation in a number of critical variables associated with
ethanol production (e.g., corn yields, gasoline prices). Second, the
ISU model captures the interaction between agricultural markets and
energy markets, and is able to examine the impacts of uncertainty in
variables within both sectors. The ability of the ISU model to account
for this variability across both sectors gives the model an advantage
over other models that are locked into a single projected fuel price or
corn crop estimate. Third, documentation for the ISU model is
relatively straightforward and transparent compared to other options,
and allows all interested parties to understand the assumptions that
drive the results.\18\ Fourth, the ISU model was designed to be easily
and regularly updated with the most recently available data, such as
USDA's World Agricultural Supply and Demand Estimates (WASDE) and the
Energy Information Administration's (EIA) Short Term Energy Outlook
(STEO) reports, making it useful for analysis looking at fairly short
time frames (e.g., within one year into the future).\19, 20\ Finally,
we note that the ISU model has been used in analytical work conducted
outside EPA; reports based on such work are and have been available in
the public domain for review. We are using a model, in other words,
that has been subjected to external scrutiny independent of our own
analysis. By way of example, many commenters cited a non-EPA study that
used the ISU model and same basic approach we adopt here to analyze
potential impacts of a waiver in 2012.\21\ EPA is not aware

of any significant technical criticism of the ISU model itself.\22\
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    \18\ For a recent example of this documentation, see: Babcock,
B. ``Updated Assessment of the Drought's Impacts on Crop Prices and
Biofuel Production.'' (``Babcock-Iowa State.'') Center for
Agricultural and Rural Development, CARD Policy Brief 12-PB 8,
August 2012, available in the docket and at http://www.card.iastate.edu/policy_briefs/display.aspx?id=1169.
    \19\ http://www.usda.gov/oce/commodity/wasde/.
    \20\ http://www.eia.gov/forecasts/steo/.
    \21\ Babcock-Iowa State.
    \22\ The assumptions and inputs used within any model are of
critical importance to modeled results, and we explain our selection
of key inputs below.
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    The ISU model is a stochastic equilibrium model that projects,
among other outputs, the prices of corn, ethanol and blended fuel given
uncertainty in six variables: U.S. corn yields, U.S., Brazilian, and
Argentinean soybean yields, U.S. wholesale gasoline prices, and
Brazilian ethanol production.\23\ The analysis simulates 500 scenarios,
and for each one the model independently picks a value for each
exogenous factor (such as U.S. corn yield) by randomly selecting from a
probability distribution curve for that factor. Since the probability
of the specific value of a given corn yield is built into the
distribution curve for corn yields, the greater the probability of a
certain corn yield, the more likely it is that the model will pick that
value for any scenario. The result is that the distribution of the
random draws for each exogenous factor fairly reflects the probability
of the various uncertain variables. For each of the 500 scenarios, the
model projects ethanol production and the prices of corn, ethanol, and
blended fuel based on the values picked for the exogenous factors for
that run. As mentioned above, we ran the model with and without a
waiver, modeling 500 different scenarios, to assess the impact of a
waiver.
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    \23\ These variables are called exogenous factors, or uncertain
variables. The gasoline price put into the model is a ``petroleum
only'' price, meaning that it represents a gallon of gasoline that
contains no ethanol.
---------------------------------------------------------------------------

    For the results described below, EPA made modifications to the
model in preparation for the current analysis. At EPA's request, ISU
researchers updated their model with data from the October WASDE and
STEO reports. After consultation with DOE, we also modified the demand
curve for ethanol to reflect our understanding of flexibility in
refinery markets over the next twelve months. A full description of the
ethanol demand curve developed in consultation with DOE can be found in
the docket.\24\ We discuss the issue of refiner flexibility more fully
in Section V.1.d below. Further, as detailed in Section V.1.c below,
the model utilizes EPA estimates regarding excess, or ``rollover''
RINs, that will be available for use for compliance purposes in the
2012/2013 corn marketing year time period. The time period analyzed is
discussed in Section V.1.b below. The estimates of rollover RINs are
based on information submitted to EPA related to RIN generation.
Additional details on the model changes and assumptions made for EPA's
analysis are included in the docket.\25\
---------------------------------------------------------------------------

    \24\ See memo to the docket from the Department of Energy on
ethanol demand for further information.
    \25\ See memos to the docket describing the ISU model
(``Description of Iowa State University Stochastic Model'') and
detailing EPA modeling results (``EPA Stochastic Modeling Results'')
for more information.
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(b) Scope of Technical Analysis
    To analyze the impact of implementation of the RFS, our technical
analysis focused on the volume of renewable fuel representing the
difference in volume between the advanced biofuel requirement and the
total renewable fuel requirement. This is the portion of the total
volume requirement that is currently met almost exclusively with corn
ethanol.\26\ EPA compared circumstances with and without a waiver to
identify the impact properly associated with the use of corn ethanol in
the implementation of the RFS program for the 2012/2013 corn marketing
year.\27\
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    \26\ Note that the RFS program does not require that this volume
of renewable fuel be met through use of corn based ethanol; any
other renewable fuel can also satisfy the requirement.
    \27\ While some of the requests for a waiver do discuss a
``whole or partial'' waiver, our analysis focuses on a waiver of the
full amount between the advanced biofuel requirement and the total
renewable fuel requirement. Analyzing scenarios with and without the
volume requirements in place helps evaluate the full impacts of the
RFS program. Because we find that it is unlikely that the RFS
requirements are having an impact in the time period analyzed, we do
not address the question of a partial waiver. If waiving the entire
volume requirement were to have no impact, then we would not expect
waiving just a portion of the requirements to have an impact.
---------------------------------------------------------------------------

    We note that several of the States requested a waiver of RFS
requirements ``in 2012 and 2013,'' although the various waiver requests
were not always specific with respect to the time period for which the
waiver was requested. EPA focused its technical analysis on the 2012/
2013 corn marketing year (which runs from September 1, 2012, to August
31, 2013) for a number of reasons. All of the petitioners referenced
the serious drought conditions as the underlying reason for waiving the
RFS volume requirements. The drought primarily affects the 2012/2013
corn marketing year, and the harm claimed by the requesters was the
impact of taking corn from the reduced crop affected by the drought and
using it to produce ethanol as a transportation fuel. The corn crop at
issue is the 2012/2013 corn marketing year crop, and it is ethanol
produced from this corn crop that was the overwhelming focus of the
waiver requests. Focusing the technical analysis on the production of
ethanol during this same 2012/2013 time period focused the analysis on
the time period where implementation of the RFS volume requirements was
claimed to be the source of the harm. In addition, focusing on the
2012/2013 marketing year is consistent with the petitioners request to
waive the RFS requirements ``in 2012 and 2013'' since it would cover
portions of both calendar years. Finally, while other time periods are
possible to analyze, data is often reported on a marketing year basis,
and analysis of commodity markets is frequently done similarly. The
WASDE data used in our analysis, as well as all other USDA projections
of U.S. corn yields, production, and prices, are done within this same
time frame.
    EPA received comment that a waiver granted for some or all of 2013
might have impacts on market dynamics in the 2013/2014 corn marketing
year, and that EPA is not limited to assessing only a one-year
impact.\28\ Commenters state that a waiver granted for some or all of
the 2013 RFS compliance year would make more RINS available for use in
2014, when the RFS standards are higher, and that such a waiver would
provide ``relief'' in 2013/2014. In considering the time frame used for
this technical analysis, EPA recognizes that we have discretion in
determining the appropriate time period to analyze. In this case,
however, and as described above, we focus our analysis on the 2012/2013
corn marketing years as that is the time period where the requesters
claim that implementation of the RFS volume requirements would severely
harm the economy. Evaluating whether implementation of the RFS volume
requirements would severely harm the economy after the end of the 2012/
2013 corn marketing year would require a new set of assumptions
regarding future crop yields, gasoline costs, refining market behavior,
and other parameters, which can be projected but are less certain at
this time.\29\ EPA believes that evaluating the potential impacts of
implementation of the RFS volume requirements in 2013/2014 should take
into account information on the 2013/2014 corn crop, as well as updates
on other information used in the analysis. While it is possible to look
over a longer time period, as some of the studies

submitted to EPA attempt to do,\30\ assessing impacts over a longer
time period introduces an additional set of variables that increase the
uncertainty of any analytical results.
---------------------------------------------------------------------------

    \28\ For example, see comments submitted by National Pork
Producers Council, available at EPA-HQ-OAR-2012-0632-2209, stating
that ``benefits of [a] waiver do not need to coincide with waiver
period'' at 26.
    \29\ For example, using gasoline prices for longer-term
projections necessarily involves a higher degree of uncertainty. The
same goes for projections related to crop yields.
    \30\ See, for example, ``Renewable Fuel Standard Waiver Options
during the Drought of 2012,'' Food and Agricultural Policy Research
Institute, University of Missouri, Report 11-12, October
12, (``FAPRI-Missouri''), available in the docket.
---------------------------------------------------------------------------

    To the extent parties believe that implementation of the RFS
program would severely harm the economy in 2014 because of the
production of renewable fuel from corn, then a future waiver request
that focuses on the harm in that time period could present analysis and
arguments addressing the impact of implementation of the RFS volume
requirements during that time period. For example, the availability of
rollover RINs in future time frames could be more limited, a fact which
could impact the results of such an analysis. However as noted above
assessing those issues now would involve a high degree of uncertainty.
To the extent parties assert that implementation of the RFS volume
requirements would severely harm the economy in 2014 because of market
based limits on the volume of ethanol in gasoline (typically referred
to as the blendwall, as blends greater than E10 or E15 may only be
marketed to flexible fuel vehicles), then a future waiver request that
focuses on this issue could present information and analysis addressing
the relevant issues. However, it would be more appropriate to consider
such issues in a future annual RFS rulemaking setting the volume
requirements for years after 2013.
    In a related vein, EPA also received comments related to EPA's
ability to renew a waiver beyond a one-year time frame.\31\ Other
commenters suggested that EPA should grant a waiver for two years. The
statute provides that a waiver granted under section 211(o)(7) of the
Act ``shall terminate after 1 year, but may be renewed by the
Administrator after consultation with the Secretary of Agriculture and
the Secretary of Energy.'' EPA interprets this provision to mean that
Congress intended the length of time for which a waiver should be
granted to be one year, and that EPA may consider, in consultation with
USDA and DOE, whether the period should be extended. Such consultation
would be in the context of evaluating the economic impacts of the
initial waiver as well as whether severe economic harm is still being
caused by implementation of the RFS volume requirements. EPA does not
need to decide now the scope of its authority for a renewal of a
waiver, especially since EPA is denying the waiver requests that are
before it. EPA clearly has authority to grant a waiver for a period of
one year only, and any renewal would need to be the subject of a
separate, if related, action.
---------------------------------------------------------------------------

    \31\ National Pork Producers Council comments at EPA-HQ-OAR-
2012-0632-2209.
---------------------------------------------------------------------------

    For these reasons, with respect to assessing the impact that
implementation of the RFS will have on ethanol production levels, and
to evaluating the impacts and potential degree of harm from
implementation of the RFS on corn prices and other factors, EPA
believes that it is appropriate in this case to focus its technical
analysis on impacts that occur from the production of ethanol in the
2012/2013 corn marketing year.
    EPA's technical analysis focuses on whether the RFS mandate has an
effect on corn ethanol production and consumption over the 2012/2013
marketing year. EPA recognizes that the drought affecting much of the
nation during 2012 has affected not only corn yields, but also other
crops used in the production of renewable fuels, most notably soybeans,
which are used as a feedstock in biomass-based diesel (BBD) production.
EPA also received comment arguing that a waiver should analyze impacts
on all potential feedstocks and volume standards under RFS.\32\ EPA
chose to focus our technical analysis on conventional ethanol, corn
prices, and related impacts primarily because the requesting States and
other parties as well as commenters focused the overwhelming majority
of their discussion on ethanol production, corn price changes, and
subsequent impacts from those increased corn prices on industries that
use corn as an input (e.g., feed, livestock, and poultry industries).
These parties assert that the RFS is creating demand for corn for use
in production of transportation fuel, and that reducing that demand via
a waiver would result in making additional corn available for other end
uses and reduce prices of corn. Because the focus of the requesting
parties is on corn and corn ethanol, we believe it is reasonable to
similarly concentrate our technical analysis on the impacts of a waiver
affecting the portion of the total renewable fuel mandate that is
currently satisfied with conventional renewable fuel RINs, the majority
of which represent corn-based ethanol.
---------------------------------------------------------------------------

    \32\ See, for example, comment from Chevron at EPA-HQ-OAR-2012-
0632-2306.
---------------------------------------------------------------------------

    At the same time, some of the requesting States mentioned the
drought's impacts on soybean crops, and many of the requesting States
requested a waiver of ``applicable volumes'' of renewable fuel.\33\
While EPA did not conduct its own technical analysis of these issues,
EPA considered the technical analysis and other information submitted
by commenters, and has determined that a waiver should not be granted
for the RFS biomass-based diesel volumes. We discuss the biomass-based
diesel and cellulosic volume requirements in section V.6.
---------------------------------------------------------------------------

    \33\ See, for example, the waiver request letter from the
Governor of Utah, at EPA-HQ-OAR-2012-0632-2486, requesting a waiver
``as to have the maximum impact on the price of corn and soybeans *
* *''.
---------------------------------------------------------------------------

(c) Availability of Rollover RINs
    Under the RFS program, RINs are valid for compliance purposes for
both the calendar year in which they are generated and the following
calendar year. By regulation, the amount of an obligated party's
Renewable Volume Obligation (RVO) that can be met using previous-year,
or ``rollover,'' RINs is capped at 20 percent. EPA explained our
interpretation of the relevant statutory provisions, and our reason for
establishing a cap of 20 percent, in the 2007 RFS final rulemaking on
RFS.\34\ For purposes of the current analysis, the number of rollover
RINs available during the 2012/2013 marketing year affects the impact
of implementation of the RFS volume requirements in 2013.
---------------------------------------------------------------------------

    \34\ 72 FR 23935 (May 1, 2007).
---------------------------------------------------------------------------

    The specific number of rollover RINs available for use in the 2012/
2013 marketing year is an input into EPA's stochastic modeling. To the
extent that the number of rollover RINs is greater, the RFS
requirements could be met with less production and blending of ethanol
in 2013. The converse is the case if the number of rollover RINs is
less. As discussed in Section V.1.d, we believe that refiners and
importers, the parties obligated to comply with a renewable volume
requirement, at least in many cases, have reasons other than the RFS
program for choosing to rely on ethanol blending for compliance
purposes. However, to the extent that the RFS program also creates such
pressure, rollover RINs reduce it in a given time period by increasing
compliance flexibility for obligated parties. It also provides more
flexibility for renewable fuel producers. From the perspective of the
ISU model, one rollover RIN is equivalent to one liquid gallon of
ethanol: both equally satisfy the RFS requirements, and thus both are
sources of ethanol to draw upon in the model.
    Based on the most current data available from the EPA Moderated
Transaction System (EMTS), EPA

projects that obligated parties will collectively be able to roll over
2 to 3 billion 2012 vintage RINs into the 2013 compliance period. EMTS
currently reports that approximately 3.5 billion 2011 vintage D6 RINs
are available for use towards 2012 compliance. As discussed above, no
more than 20 percent of a given year's renewable fuel standard can be
met with RINs from the previous year.\35\ That requirement is 15.2
billion gallons in 2012, meaning that as many as 3.04 billion 2011 RINs
can be carried over for 2012 compliance.\36\ Since these 2011 vintage
RINs expire at the end of the 2012 compliance period, obligated parties
have a strong incentive to use these RINs first, carrying over any
excess 2012 RINs into the 2013 compliance period. Based on this
incentive and supported by conversations with industry and governmental
stakeholders, EPA believes that obligated parties will utilize the
maximum possible amount of 2011 RINs (i.e., 3.04 billion RINs out of a
total 3.46 billion RINs available) for 2012 compliance and not let them
expire.
---------------------------------------------------------------------------

    \35\ 40 CFR 80.1427.
    \36\ 3.04 billion RINs is 20 percent of the total renewable fuel
requirement for 2012 (i.e., 15.2 billion gallons).
---------------------------------------------------------------------------

    Based on total 2012 EMTS data available to date, we project for
purposes of this analysis that D6 RIN rollover into the 2012/2013
marketing year period will exceed 2.0 billion. Total D6 RIN generation
for 2012 has already exceeded 10.8 billion gallons. Monthly generation
of D6 (general renewable fuel) RINs was approximately 1.05 billion in
October of 2012, only slightly lower than the 1.1 billion RINs
generated in October of 2011 and just below average for 2012 as a
whole.\37\ If monthly RIN generation holds constant at October levels
for the rest of 2012, rollover of 2012 vintage RINs to 2013 would
likely exceed 2.6 billion. If RIN generation increases in November and
December of 2012, as it did in both 2010 and 2011, rollover RIN
availability would likely exceed 2.7 billion and could potentially be
even higher. Thus in all of these scenarios, it is expected that at
least 2.0 billion rollover RINs will be available for the 2013
compliance year. Further information on RIN rollover projections is
also available in the docket.\38\
---------------------------------------------------------------------------

    \37\ Even if D6 RIN generation declines by 10 percent monthly in
November and December of 2012, we expect that the number of 2012
vintage D6 RINs available after obligated parties fulfill their 2012
compliance obligations would still exceed 2 billion, and would
likely exceed 2.5 billion. See ``RIN Rollover'' memo in the docket
for more information.
    \38\ See ``RIN Rollover'' memo in the docket.
---------------------------------------------------------------------------

    Several studies prepared by non-EPA researchers observe, and we
agree, that the availability of rollover RINs can significantly affect
the potential impact of implementation of the RFS volume requirements.
Some studies have suggested that, in scenarios where rollover RINs are
relatively scarce, waiving the effective conventional renewable fuel
volume requirement might lead to a significant decrease in corn prices.
However, if significant numbers of rollover RINs (i.e., 2.0 billion or
more) are available, these studies suggest that the effect of a waiver
is significantly smaller.\39\
---------------------------------------------------------------------------

    \39\ See Babcock-Iowa State. See also Purdue University/Farm
Foundation study,''Potential Impacts of a Partial Waiver of the
Ethanol Blending Rules,'' EPA-HQ-OAR-2012-0632-0025.
---------------------------------------------------------------------------

    EPA recognizes that the estimate of rollover RIN availability used
in the ISU model (and other models) can have a significant effect on
the results of the modeling. For purposes of our analysis, EPA assumed
that no more than 2.0 billion rollover RINs would be available for use
in the 2012/2013 time period. As discussed above, current data suggest
that RIN rollover is likely to be higher or even significantly higher
than this. We believe 2.0 billion rollover RINs is a conservative
analytical assumption.
    Historically refiners and blenders have blended more ethanol than
required due to its favorable economics, leading to the large carryover
RIN balance discussed above. EPA received comment suggesting that even
if the blending economics were not favorable for ethanol, refiners and
blenders might look forward to future obligations and purposefully
over-comply with the RFS requirements in 2013 to increase their
``bank'' of relatively low-cost RINs that could be carried into 2014,
in case they anticipate RIN prices to be higher then. If such behavior
were to take place, ethanol production in the 2012/2013 corn marketing
year would be higher than the level projected in the ISU modeling
results. The implication is that the waiver could have a slightly
larger impact on ethanol production and corn prices than what is
projected in the ISU modeling results. If this type of over-complying
behavior were to take place, we would expect demand for ethanol to be
right at the E10 blend wall limit in 2012 and 2013. However, the
empirical data does not support the theory that obligated parties are
over-complying to the maximum extent that they can bank RINs today,
since there is still a small but significant gap between the volumes of
ethanol consumption our modeling projects for next year and the
estimated E10 blend wall. Even if parties were to engage in over-
compliance for banking purposes in 2013, their desire to do so would
likely be limited by their ability to blend ethanol into low level
blends (i.e., E10). Therefore, we do not believe that this type of
behavior would have any appreciable effect on our analysis for this
waiver decision.
(d) Flexibility in the Refining Sector
    In assessing the impact of implementing the RFS volume requirements
in the 2012/2013 time frame on ethanol production, a key consideration
is the economic incentives for refiners to use ethanol during that time
frame as well as the ability of refiners and fuel blenders to reduce,
over that one-year timeframe, the quantity of ethanol currently being
blended into the gasoline pool. As ethanol production and availability
in the U.S. has increased over the past 10 years, the economics of
blending ethanol into gasoline have been such that many refiners have
transitioned from producing primarily finished gasoline to producing
primarily blendstocks for oxygenate blending (BOBs) which require the
addition of ethanol in order to meet the specifications of finished
gasoline. However, assuming refiners wanted for business reasons to
reduce the quantity of ethanol blended into the gasoline pool, refiners
would have to seek alternative high octane blend stocks or
significantly adjust refinery operations to make up for the volume and
octane increase they currently receive from ethanol. Logistical
challenges to the refined product distribution system would also have
to be overcome in parallel with the necessary refinery operation
changes.\40\
---------------------------------------------------------------------------

    \40\ See Department of Energy memo on ethanol demand, available
in the docket, for further information. See also EPA memo,
``Economics of Ethanol Blending and Refining Sector Flexibilities,''
available in the docket.
---------------------------------------------------------------------------

    As mentioned, currently most refiners produce a sub-octane
unfinished gasoline lacking oxygenates called blendstocks for oxygenate
blending (BOBs). These BOBs are transported through fuel pipelines or
other modes to petroleum product terminals where they are then blended
with ethanol and become finished gasoline. Since ethanol is generally
not produced near large refineries and may absorb water and impurities
that normally reside in petroleum product pipelines, a separate ethanol
distribution system has been established to distribute and ultimately
blend ethanol into BOBs at terminals to produce the finished fuel.

    One reason refiners choose to blend ethanol into gasoline is for
purposes of boosting gasoline octane levels. Ethanol has an octane
value of 115 (R+M/2) while finished gasoline's pump octane value ranges
from 87-93.\41\ Ethanol also has a value as a gasoline extender when
blended into the gasoline pool. Other properties of ethanol, such as
its volatility and low sulfur and benzene content, influence its value
to refiners. Each refiner is expected to make decisions about ethanol
blending independently, in light of the value they place on these
factors and the complexity and uniqueness of each refinery. Where the
blending of ethanol is profitable to refiners we expect that they would
continue to blend ethanol into the gasoline pool even in the absence of
a renewable fuel requirement.\42\
---------------------------------------------------------------------------

    \41\ Octane rating or octane number is a standard measure of the
performance of a motor or aviation fuel. The higher the octane
number, the more compression the fuel can withstand before
detonating.
    \42\ EPA acknowledges that the blending economics for ethanol
are significantly different for E10 and E85. Our ethanol demand
curve takes these differences into consideration, resulting in large
drop in the ethanol to gasoline price ratio at the volume of ethanol
that corresponds to the E10 blendwall.
---------------------------------------------------------------------------

    After consultation with DOE, review of comments, and analysis
undertaken by EPA, we determined that, assuming refiners had an
economic incentive to reduce ethanol blending, refiners have limited
flexibility to make the necessary adjustments to reduce ethanol
blending if a one year waiver of the RFS program were granted under
projected scenarios for ethanol and gasoline prices. Our modeling
inputs reflect this determination.\43\ At current ethanol and crude oil
prices, the blending of ethanol into gasoline is an economically
beneficial practice for refiners, and based on EIA forecasts this is
expected to continue through at least 2013. However if that were to
change and blending ethanol into gasoline was no longer an economically
beneficial practice for refiners, we believe that the challenges at
both the refinery level and in the refined product distribution system
would be significant deterrents to reductions in ethanol blending in
response to a one-year waiver. Studies conducted by independent
organizations such as Morgan Stanley and Hart Energy, among others,
support our assumption that refiners would be limited in their ability
to reduce ethanol blending if a one year waiver of the RFS requirements
is granted under current economic circumstances.\44\ For example,
Morgan Stanley argues that there would be significant impediments to
moving away from ethanol because it is widely available and is the
least expensive source of octane/oxygenates for most refineries.
Similarly, Hart Energy estimates that ethanol's octane value and the
cost of partially replacing ethanol use will limit the economic
attractiveness to refiners of using less ethanol even with a waiver.
They conclude that because an RFS waiver cannot force a reduction in
domestic ethanol usage or exports, a waiver would likely have a small,
if any, effect on reducing corn prices based on the continued demand
for ethanol under current market economics.
---------------------------------------------------------------------------

    \43\ We note that our analysis does take into account different
fuels where appropriate, including imported ethanol derived from
sugarcane.
    \44\ Morgan Stanley, ``Ethanol Demand a Function of Economics,
Not RFS,'' August 7, 2012. Hart Energy Special Report, ``U.S.: RFS
Waiver Unlikely to Affect Ethanol Use,'' October 12, 2012. Both
analyses are available in the docket.
---------------------------------------------------------------------------

    EPA also received comments from the American Petroleum Institute,
Chevron, and Marathon Petroleum Company stating that a one year waiver
would be unlikely to result in a significant decrease in ethanol
blending.\45\ Though we did receive some comment arguing that refiners
could make operational changes quickly, commenters provided little
evidence upon which to assess this claim. These comments are likely
based on historical practices when splash blending of ethanol was much
more prevalent and refining and distribution had not optimized toward
the use of ethanol.
---------------------------------------------------------------------------

    \45\ Comments submitted by American Petroleum Institute, EPA-HQ-
OAR-2012-0632-2240, Chevron, EPA-HQ-OAR-2012-0632-2306, and Marathon
Petroleum Company, EPA-HQ-OAR-2012-0632-1968.
---------------------------------------------------------------------------

    Several commenters cited the challenges that refiners would face in
reducing the quantity of ethanol blended into the gasoline pool in the
near term as justification for a longer-term waiver.\46\ These
commenters stated that doing so would allow the refining industry
sufficient time to address the operational and logistical challenges
mentioned in the previous paragraphs and be necessary to result in
reduced ethanol demand and consequent relief from high corn prices to
affected industries. While we recognize that analyzing a longer period
could affect the results of our modeling, EPA did not conduct such an
analysis here for the reasons discussed above, including the high
uncertainty involved in projecting relevant conditions further into the
future. As such our technical analysis is based on the impacts of
implementation and a potential waiver over a period of one year.
---------------------------------------------------------------------------

    \46\ See for example National Chicken Council comments, EPA-HQ-
OAR-2012-0632-1994 and Grocery Manufacturers Association comments,
EPA-HQ-OAR-2012-0632-2341.
---------------------------------------------------------------------------

2. Projected Impact of Implementation of the Renewable Fuel Standard

    We ran the ISU model with the updates and inputs described above
and here describe the outputs. The ISU model projects that the average
expected amount of conventional ethanol produced in the United States
during the 2012/2013 corn crop year without a waiver will be 12.48
billion gallons. ISU's model predicts that for 89 percent of the
simulated scenarios, waiving the RFS requirements would not change the
overall level of corn ethanol production or overall U.S. ethanol
consumption in 2012/2013 because in the event of a waiver the market
would demand more ethanol than the RFS would require. For those 89
percent of the scenarios, waiving the RFS requirements would therefore
have no impact on ethanol use, corn prices, ethanol prices, or fuel
prices. We refer to that model result as an 89 percent probability that
the RFS will not be ``binding'' in the 2012/2013 marketing year.
Conversely, in 11 percent of the simulated ISU model runs the RFS would
be binding. In those 11 percent of the random draws, the resulting
market demand for ethanol would be below the RFS requirement and,
therefore, the RFS would require greater use of ethanol than the market
would otherwise demand. The binding scenarios are generally those in
which projected fuel prices and corn yields are both unrealistically
low, with both gasoline prices and corn yields in 2012/2013 falling
significantly below their current DOE and USDA projections.\47\ In
those cases, the RFS would have an impact, albeit a limited or moderate
one, on ethanol use and the food and fuel markets in the United States.
---------------------------------------------------------------------------

    \47\ Were we to use the November WASDE estimates, the percentage
of time that the RFS requirements are projected to be not binding
would be even higher, due to the increase in the lower end of the
corn yield projections.
---------------------------------------------------------------------------

    The ISU model assumes corn ethanol would account for at most 13.6
billion gallons of the RFS volume requirement during the 2012/2013 corn
marketing year. Because the corn marketing year is split over two RFS
compliance years, the 13.6 billion gallons is based on the fraction of
the marketing year that would occur in the 2012 compliance year (one-
third) and the 2013 compliance year (two-thirds). EISA requires 15.2
billion gallons of renewable fuels in 2012 and 16.55 billion gallons in
2013; however, 2 billion gallons of the 2012 volume and 2.75 billion
gallons of the 2013 volume

must be from advanced biofuels. While advanced biofuels, including
biomass-based diesel, advanced ethanol, and cellulosic biofuels are
included in the ISU model we focus our analysis on evaluating the
effects of a waiver of the portion of the RFS volume requirement filled
by corn ethanol (see Section V.1.b). The full results from this
analysis are included in the docket. The modeling projects that 2.0
billion gallons of rollover RINs from 2012 will be used to meet the
13.6 billion gallons during this time period.
    Certain empirical data also support the projection that the RFS is
unlikely to be binding in the 2012/2013 timeframe. For example, the
price of tradable renewable identification number (RIN) credits remains
relatively low: below five cents per gallon as of September 26, 2012.
Refiners and importers verify their compliance with the RFS by
collecting and retiring RINs, which are assigned to volumes of
renewable fuel by their producers. Refiners and importers use RINs for
an appropriate volume of renewable fuel to demonstrate compliance with
their RFS volume requirement. Parties that exceed their RFS obligations
for a compliance period can trade excess RINs to other parties that
need them for compliance, or under certain conditions, can bank them
for future compliance. When the RFS requirement is expected to be
binding, we would expect the demand for RINs would increase and the
supply of excess RINs to decrease, leading to an increase in RIN
prices.
    Therefore, we expect the current RIN price reflects the market's
current and near-term expectations about how binding the RFS is likely
to be. Recent RIN prices represent a very small share of the price of a
gallon of ethanol, suggesting that refiners and blenders expect the RFS
is not likely to be binding in 2012 or 2013. It is possible that RIN
prices have been depressed by market uncertainty generated by the
recent waiver requests. However, the record high RIN price before these
waiver requests was only approximately 6.5 cents per gallon. In this
particular case, the empirical RIN price information corroborates the
modeled impacts of the RFS.

3. Analysis of the Degree of Impact

    When evaluating the economic impacts of implementation of the RFS
volume requirements, our analysis centered on four major areas: average
U.S. corn prices, food prices, feed prices, and fuel prices. While
there may be other areas of potential impact, we focused on these areas
because they are expected to have the largest potential economic
impacts in the U.S. Given the time available for this analysis, we have
not looked at the interaction of these impacts in an integrated
modeling system. However, we believe that looking at these indicators
individually provides a useful framework for determining the impact of
the RFS volume requirements.
    As discussed above, the body of information shows that it is very
likely that the RFS volume requirements will have no impact on ethanol
production volumes in the relevant time frame, and therefore no impact
on corn, food, or fuel prices. In the unlikely event that the RFS
program would have an impact on the corn and other markets during the
2012-2013 timeframe, its nature and magnitude is described below. Our
analysis considers the impact in three ways (1) when the RFS volume
requirements are not binding (89% of the scenarios), (2) the average
across all 500 scenarios, binding and not binding, (3) and the average
across the binding scenarios (11%). As a bounding exercise, we also
provide information on a ``worst case'' scenarios from within the
binding scenarios (see Section V.3.e below).
(a) Corn Price Impacts
    Based on the ISU modeling results, the average expected impact of
waiving the RFS requirements over all the potential outcomes would be a
decrease in the price of corn by $0.07/bushel. This average result must
be considered in context, however, since our analysis projects that it
is highly likely that the RFS volume requirements are not binding, and
that the impact on corn prices will be zero. There is only an 11%
chance that the requirements will be binding. Because of this, we
project that it is highly likely that the impact of waiving the RFS
program is zero change in corn prices. However, in the subset of
potential outcomes in which the RFS requirements are binding (11
percent of the results), waiving the program would result in an average
expected decrease in the price of corn of $0.58/bushel. This leads to a
non-zero average impact across all 500 scenarios, even though the most
likely result is still zero impact. Table V.3.a-1 presents the ISU
scenarios.

                                  Table V.3.a-1--Range of Estimated Corn Prices
----------------------------------------------------------------------------------------------------------------
                                                          Iowa State mean    Iowa State when    Iowa State when
                                                              estimate      RFS does not bind      RFS binds
----------------------------------------------------------------------------------------------------------------
Mean Corn Prices with Mandate ($/bushel)...............              $8.02              $8.00              $8.15
Mean Corn Prices with Waiver ($/bushel)................              $7.95              $8.00              $7.57
Change in Corn Prices with Waiver ($/bushel)...........             -$0.07              $0.00             -$0.58
Percentage of Runs.....................................               100%                89%                11%
----------------------------------------------------------------------------------------------------------------

(b) Food Price Impacts
    In consultation with USDA, EPA estimated how these projected
changes in corn prices would influence U.S. food prices. It is highly
likely that the RFS volume requirements are not binding and there will
be no impact on food prices. The results of the modeled corn price
impacts discussed above appear to be modest for both the mean estimate
and the subset of scenarios in which the RFS requirements are binding
(see Table V.3.b-1). A $0.07/bushel decrease in corn prices would
result in a 0.04% decrease in Food consumer price index (CPI) and a
0.006% decrease in All Item CPI. A $0.58/bushel decrease in corn prices
would result in a 0.35% change in Food CPI and a 0.049% change in All
Item CPI. For the average household, a $0.07/bushel decrease in corn
prices would result in a reduction of household expenditures on food
equal to $2.59 in 2012/2013, while a $0.58/bushel decrease in corn
prices would result in a savings of $22.68.
    Since people in the lowest income groups are more sensitive to
changes in food prices, we also analyzed the impact of changes in food
expenditures as a percentage of total consumer expenditures and as a
percentage of income. The changes in food expenditures are relatively
small compared to total consumer expenditures for both average and low
income households. When comparing the changes in food expenditures
relative to income, the impact on low

income households is larger than the impact on average households.
Additional details on the methodology used to calculate the CPI and
household expenditures are included in the docket.\48\

                Table V.3.b-1--Impacts on Food Prices, CPI Indicators, and Household Expenditures
----------------------------------------------------------------------------------------------------------------
                                                                                ISU mean      ISU when RFS
                                                              Units                  estimate          binds
----------------------------------------------------------------------------------------------------------------
Change in Corn Prices with Waiver..............  $/bushel.......................          -$0.07          -$0.58
Change in Food CPI with Waiver.................  Percent........................           -0.04           -0.35
Change in All Item CPI with Waiver.............  Percent........................          -0.006          -0.049
Change in Annual Food Expenditures for Average   $..............................          -$2.59         -$22.68
 Household with Waiver.
Change in Annual Food Expenditures for Lowest    $..............................          -$1.42         -$12.46
 Quintile Household with Waiver.
Change in Food Expenditures as a Percentage of   Percent........................          -0.005          -0.047
 Consumer Expenditures for Average Household
 with Waiver.
Change in Annual Food Expenditures as a          Percent........................          -0.007          -0.061
 Percentage of Consumer Expenditures for Lowest
 Quintile Household with Waiver.
Change in Food Expenditures as a Percentage of   Percent........................          -0.005          -0.046
 Income After Taxes for Average Household with
 Waiver.
Change in Food Expenditures as a Percentage of   Percent........................         -0.0065          -0.057
 Income After Taxes for Lowest Quintile
 Household with Waiver.
----------------------------------------------------------------------------------------------------------------

(c) Feed Price Impacts
    Using WASDE projections (which assume the mandate is in place) for
feed costs in 2012/2013, we estimated that U.S. feed prices are
projected to be $318.45/ton, using a weighted average use of corn,
sorghum, barley, oats, and soybean meal. In estimating the impact of a
change in corn prices on feed costs, we used a simplifying assumption
that the percentage change in corn prices is applied to all components
of the feed grains components used in this analysis. Since the price of
other feed grains tend to track the price of corn, we believe this
simplifying assumption is a realistic estimate of how feed grains will
track each other with changes in corn prices. It is highly likely that
the RFS volume requirements are not binding, and there will be no
impact on feed prices. We estimated the potential impact of granting
the waiver on feed costs for the corn price scenarios described in the
previous sections: the ISU mean estimate of a $0.07/bushel decrease in
corn price and the subset of ISU scenarios in which the mandate is
binding ($0.58/bushel decrease in corn price).
---------------------------------------------------------------------------

    \48\ See USDA memo on Food CPI and Food Expenditures in docket.

                                         Table V.3.c-1--U.S. Feed Prices
----------------------------------------------------------------------------------------------------------------
                                                      2009/10         2010/11         2011/12         2012/13
----------------------------------------------------------------------------------------------------------------
Feed Cost ($/ton) without Waiver................         $158.17         $212.93         $255.38         $318.45
Decrease in Feed Costs, $/ton ($0.07/bushel corn  ..............  ..............  ..............          -$1.88
 price change scenario).........................
Decrease in Feed Costs, $/ton ($0.58/bushel corn  ..............  ..............  ..............         -$16.50
 price change scenario).........................
----------------------------------------------------------------------------------------------------------------
Source: October 10, 2012 WASDE.
Note: Feed is equal to the weighted average sum of feed use of corn, sorghum, barley, and oats plus domestic use
  of soybean meal.

    Based on USDA's estimates for U.S. livestock feed costs and
returns, we estimated the impact of a percentage change in feed costs
per unit for poultry, hogs, fed cattle, cow-calfs, and milk production.
Details on the methodology used to calculate feed impacts are included
in the docket. Using USDA's production and slaughter estimates, we
aggregated the potential feed cost impacts of a waiver for the U.S. and
the States that requested a waiver. Table V.3.c-2 presents the
estimated changes in total nationwide and statewide feed costs due to
the corn price changes observed in our modeling, alongside 2011
livestock revenue and GDP. As Tables V.3.c-3, V.3.c-4, and V.3.c-5
show, in dollar terms, the largest sectors of the livestock industry
that could potentially benefit from the waiver are the cattle and dairy
industry. However, as a portion of total feed costs, the impacts are
similar across livestock types. As stated above, it is highly likely
that the RFS volume requirements are not binding and there will be no
impact on feed prices. However, we present the potential impacts from
the corn price changes noted above in order to illustrate what might
happen under those circumstances.
    When considering impact of the implementation of the RFS volume
requirements, EPA considered the impacts in both absolute terms and
relative to the entity being affected, since impacts will be more
meaningful for some states than others. Texas, for example, sees the
largest dollar value feed impacts among states that requested a waiver.
Our average projected corn price impact of $0.07/bushel represents a
decrease of $35.2 million in total feed costs. However, this is only a
0.6 percent decrease in total Texas feed costs, which is equivalent to
approximately 0.2 to 0.4 percent of State livestock revenue. In the 11
percent of cases where we modeled the RFS requirements as binding, we
project that a waiver might decrease Texas feed costs by about $308.5
million (a 2.0-3.8 percent decrease in feed costs).
    In a State like Arkansas, where livestock revenue represents about
3.5 percent of state GDP (the largest proportion of any state that
requested a waiver of the RFS mandate), the impact of the waiver might
be expected to have a larger impact. However, here we see only a 0.5
percent decrease in feed costs in the $0.07/bushel case, which is
equivalent to only a 0.06 to 0.1 percent impact on State livestock
revenue.

 Table V.3.c-2--2011 Gross Domestic Product, 2011 Livestock Revenue, and Projected Total Feed Costs and Estimated Decrease With RFS Waiver for Combined
                                 Cattle, Poultry, Pork, and Dairy Production in the U.S. and States Requesting a Waiver
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Decrease in feed   Decrease in feed
                                                            Total feed costs   costs in million   costs in million      2011 State
                                                             without waiver    $ ($0.07/bushel    $ ($0.58/bushel   livestock revenue  2011 GDP (million
                                                              (million $)     corn price change  corn price change     (million $)             $)
                                                                                scenario)          scenario)
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S......................................................          77,802.37            -451.93          -3,964.30            123,400         14,981,020
AR.......................................................             526.83              -2.84             -24.95              3,900            105,846
DE.......................................................             364.77              -1.88             -16.49                700             65,755
FL.......................................................             738.80              -4.31             -37.80              1,340            754,255
GA.......................................................           1,619.71              -8.69             -76.19              3,900            418,943
MD.......................................................             295.42              -1.66             -14.52              1,000            301,100
NM.......................................................           1,289.02              -7.61             -66.78              2,100             79,414
NC.......................................................           2,728.98             -15.32            -134.37              5,400            439,862
TX.......................................................           6,041.58             -35.17            -308.47             10,800          1,308,132
UT.......................................................             538.24              -3.18             -27.87                917            124,483
VA.......................................................           1,006.17              -5.63             -49.40              1,800            428,909
WY.......................................................              23.00              -0.14              -1.19                840             37,617
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In addition to examining total feed costs in each state, we
analyzed the impacts on the three main segments of the livestock
industry: cattle and dairy, pork, and poultry and eggs. Here we present
both the projected national-level impacts of a waiver and the impacts
in selected States (chosen either because their livestock industry is
large or because we observed a larger proportional impact on their
market in cases where the mandate affects corn prices).
    As observed above, it is highly likely that the RFS volume
requirements are not binding and there will be no impact on these
industries. Our analysis suggests that implementation of the RFS
program, when binding, has a proportionally greater impact on the
cattle and dairy industries, and those industries would consequently
see greater cost reductions from a waiver in those scenarios. National
cattle and dairy feed costs would decrease by 0.6 percent with a
waiver. Texas, New Mexico, and Florida see the largest cattle and dairy
feed cost impacts of a waiver in total dollar value, while Delaware and
Utah would, along with Florida and New Mexico, see the largest cattle
and dairy feed impacts from a waiver as a proportion of their total
revenue in this sector. These outcomes indicate that, if the RFS volume
requirements were binding, these are the states where a waiver may have
the most impact on economic activity related to cattle and dairy. We
present the impacts on their sectors below in Table V.3.c-3. In the
$0.07/bushel case, the impact of a waiver in all of these states is
less than a 1 percent reduction in cattle and dairy feed costs. This
reduction represents a change of approximately 0.35 percent of Texas
livestock revenue and a change of approximately 0.38 percent for New
Mexico and Florida. In Delaware, the state where the change in feed
costs has the greatest proportional effect on the cattle and dairy
industry (due to the small size of this sector in Delaware), this
reduction in costs would be equivalent to a 0.5-0.8 percent increase in
cattle and dairy revenue and an approximately 0.0002 percent increase
in Delaware State GDP. Impacts in Delaware would increase to 4.5-7.1
percent of cattle and dairy revenue in the $0.58/bushel scenario. A
full comparison of these impacts to cattle and dairy revenues is
available in the docket.\49\
---------------------------------------------------------------------------

    \49\ See memo on ``Livestock Impacts'' in docket.

  Table V.3.c-3--Total Feed Costs and Estimated Decrease With RFS Waiver for Cattle and Dairy Production in the
                       U.S. and Selected States Requesting a Waiver in Millions of Dollars
----------------------------------------------------------------------------------------------------------------
                                                                             Decrease in feed   Decrease in feed
                                                          Total feed costs   costs in million   costs in million
                                                           without waiver    $  ($0.07/bushel   $  ($0.58/bushel
                                                           (in million $)   corn price change  corn price change
                                                                                scenario)          scenario)
----------------------------------------------------------------------------------------------------------------
U.S....................................................          49,518.32            -292.44          -2,565.30
TX.....................................................           5,114.25             -30.20            -264.94
NM.....................................................           1,288.82              -7.61             -66.77
FL.....................................................             533.78              -3.15             -27.65
UT.....................................................             482.60              -2.85             -25.00
DE.....................................................              27.75              -0.16              -1.44
----------------------------------------------------------------------------------------------------------------

    The proportional impact of a waiver on the national pork industry
is projected to be about the same as cattle and dairy, approximately
0.6 percent. Of the states that submitted waiver requests, we project
that the combined pork industry of North Carolina and Virginia would
benefit the most from a waiver if the RFS volume requirements were
binding, followed by Texas and Arkansas.\50\ A $0.07/bushel decrease in
corn prices is projected to reduce hog feed costs by just under $10
million in North Carolina and Virginia. We project an average savings
of $87.35 million in cases where the mandate is binding. Impacts on
pork revenue and State GDP in Texas and Arkansas would be smaller in
both absolute and proportional terms. Impacts in Florida and Delaware,
where the impact on the pork sector is much smaller in absolute terms
but represents a large percentage of total pork revenue, in the $0.07/
bushel case would represent less than 1 percent of their respective
state livestock revenues and less than one thousandth of a percent of
their State GDPs.
---------------------------------------------------------------------------

    \50\ The pork industries of North Carolina and Virginia are here
analyzed together, owing to the fact that both are dominated by the
operations of one company. Because of this, their pork feed costs
and revenues are intertwined and are here examined together.

   Table V.3.c-4--Total Feed Costs and Estimated Decrease With RFS Waiver for Pork Production in the U.S. and
                                       Selected States Requesting a Waiver
----------------------------------------------------------------------------------------------------------------
                                                                             Decrease in feed   Decrease in feed
                                                          Total feed costs   costs in million   costs in million
                                                           without waiver    $  ($0.07/bushel   $  ($0.58/bushel
                                                           (in million $)   corn price change  corn price change
                                                                                scenario)          scenario)
----------------------------------------------------------------------------------------------------------------
U.S....................................................          14,439.12             -85.27            -748.02
NC/VA..................................................           1,686.06              -9.96             -87.35
TX.....................................................              51.95              -0.31              -2.69
AR.....................................................              27.21              -0.16              -1.41
FL.....................................................               4.30              -0.03              -0.22
DE.....................................................               1.93              -0.01              -0.10
----------------------------------------------------------------------------------------------------------------

    The proportional impact of a waiver on the national poultry and egg
industries is projected to be slightly smaller than those that might
accrue to cattle and dairy and hogs, approximately 0.5 percent. The
impacts of a waiver on the poultry industry are also the smallest of
the three sectors in absolute terms. Of the states that submitted
waiver requests, we project that Georgia's poultry industry would
benefit the most from a waiver if the RFS volume requirements were
binding, followed by North Carolina and Texas. A $0.07/bushel decrease
in corn prices is projected to reduce Georgia poultry feed costs by
6.74 million. We project feed cost savings of $59.11 million in cases
where the mandate is binding. We project that poultry revenue impacts
in North Carolina and Texas would be smaller in absolute terms but
roughly equal proportional terms. Impacts in Utah and Florida would be
equivalent to a larger portion of total poultry revenue, but would
still only represent between 0.1 and 0.3 percent of revenue in the
$0.07 per bushel case.

  Table V.3.c-5--Total Feed Costs and Estimated Decrease With RFS Waiver for Poultry and Egg Production in the
                                  U.S. and Selected States Requesting a Waiver
----------------------------------------------------------------------------------------------------------------
                                                                             Decrease in feed   Decrease in feed
                                                          Total feed costs   costs in million   costs in million
                                                           without waiver    $  ($0.07/bushel   $  ($0.58/bushel
                                                           (in million $)   corn price change  corn price change
                                                                                scenario)          scenario)
----------------------------------------------------------------------------------------------------------------
U.S....................................................          13,844.94             -74.21            -650.98
GA.....................................................           1,290.01              -6.74             -59.11
NC.....................................................           1,136.26              -5.91             -51.86
TX.....................................................             875.37              -4.66             -40.83
FL.....................................................             200.72              -1.13              -9.92
UT.....................................................              51.48              -0.30              -2.65
----------------------------------------------------------------------------------------------------------------

    In their waiver requests, most States cited quantitative impacts on
their agricultural sectors that are already realized or projected to
occur due to the drought. EPA recognizes the significant impacts that
the drought has had on state and national agricultural sectors.
However, as we discuss above, the analytical task before us is to
determine whether implementation of the RFS volume requirements
themselves severely harm the economy. Most of the States that submitted
waiver requests discuss the crucial role that corn prices play in the
overall financial health of their livestock industries, but for the
most part these States did not attempt to quantify in detail the impact
of waiving the RFS on corn prices and the livestock industry. Various
commenters in the livestock sector did provide analysis attempting to
quantify the possible impact of a waiver on corn and soybean meal
prices; these studies or the analyses such studies rely on are examined
in Section V.4.b below.\51\
---------------------------------------------------------------------------

    \51\ See, for example analysis prepared for the North Carolina
Poultry Federation at EPA-HQ-OAR-2012-0632-2429, and comments
submitted by the Virginia Poultry Federation at EPA-HQ-OAR-2012-
0632-2066.
---------------------------------------------------------------------------

    In summary, our analysis suggests that it is very likely that the
RFS volume requirements will have no impact at all on ethanol
production volumes in the

relevant time frame, and therefore no impact on corn or feed prices.
EPA looked, however, at what impacts on corn and feed prices might be
in the unlikely event that the RFS mandate would have an impact on the
corn and feed prices during the 2012/13 time frame. EPA assessed feed
price impacts at the national level, State level, and at the individual
sector level within eleven States. EPA believes that analyzing the feed
price impacts on the nation, States, and individual sectors at the
national and State levels is appropriate and provides further evidence
upon which to base this decision, even considering the low probability
that the RFS volume requirements will have an impact on ethanol
production volume, and therefore corn and feed prices, in the relevant
time frame. Given the low probability of the RFS having an impact in
that time frame, and the estimated impact to state livestock sectors,
EPA did not analyze any further geographical areas, as we consider the
analysis above sufficient basis upon which to base our decision.
    EPA received comment that, during a period of drought, impacts
attributable to the RFS, even if relatively small, could be enough to
influence firm-level decisions regarding whether to continue operations
or to shut down. Since our analysis indicates that the RFS is highly
unlikely to have an impact on ethanol production, and therefore corn
prices, in the time period of concern, and our analysis necessarily
focuses on the level of an economy, as opposed to the firm-level, we
did not conduct analysis assessing the incremental impact the RFS would
have, if any, on individual firms.
(d) Fuel Price Impacts
    The ISU model also predicts changes in U.S. ethanol, gasoline, and
blended fuel prices based on changes in ethanol production volumes.
EPA's analysis indicates that it is highly likely that the RFS volume
requirements are not binding and there will be no impact on fuel
prices. The ISU modeling projects that the average impact across all
modeled scenarios is that waiving the RFS mandate would decrease
blended gasoline prices by 2/10 of one cent.\52\ Blended gasoline
prices in the ISU model decrease slightly on average across all of the
modeled scenarios because ethanol prices decline by roughly one cent
with less ethanol demand, for the limited scenarios where the RFS
volume requirements are binding. We note, however, that this estimate
should be considered within the limitations of the ISU model. The ISU
model is not a refinery or fuel system model, and does not consider
responses in the fuel markets to a reduction in U.S. ethanol demand in
any depth. We include an estimate here to examine the potential
magnitude of changes on average across all of the modeled scenarios,
but we note that these results are based on a fairly simplistic
approach to estimating blended gasoline price impacts.
---------------------------------------------------------------------------

    \52\ As with the average impact on corn prices, this figure is
potentially misleading, in the sense that it is a non-zero outcome
even though the most likely impact is zero (see Section V.3.a
above).

  Table V.3.d-1--Range of Estimated Ethanol and Blended Gasoline Prices
------------------------------------------------------------------------
                                                             ISU mean
                                            Units            estimate
------------------------------------------------------------------------
Mean Ethanol Price with Mandate...  $/gallon............           $2.90
Mean Ethanol Price with Waiver....  $/gallon............           $2.89
Mean U.S. Corn Ethanol Production   billion gallons.....           12.48
 with Mandate.
Mean U.S. Corn Ethanol Production   billion gallons.....           12.44
 with Waiver.
Blended Gasoline Price with         $/gallon............          $2.918
 Mandate.
Blended Gasoline Price with Waiver  $/gallon............          $2.916
Change in Blended Gasoline Price..  $/gallon............          $0.002
------------------------------------------------------------------------

    Given the limitations associated with our estimate on fuel price
impacts, we present the projected average impact on fuel prices in
Table V.3.d-1 as a sensitivity analysis. Were blended gasoline prices
to change as the ISU model projects as a result of a waiver, this is
the average impact we might expect to see. Based on these small
predicted changes in blended gasoline prices, the overall impacts on
the economy as it relates to fuel prices are also expected to be
modest. It is highly likely that the RFS volume requirements are not
binding and there will be no impact on fuel prices. Our analysis shows
that a $0.002/gallon decrease in blended gasoline price for the Iowa
State mean scenario would be expected to change the Energy CPI by
0.029%. Details on the methodology for determining these impacts are
included in the docket.\53\
---------------------------------------------------------------------------

    \53\ See Department of Energy memo on Energy CPI in docket.
---------------------------------------------------------------------------

    For the average household that owns a vehicle, the $0.002/gallon
change in gasoline prices would result in a $1.98 decrease in annual
gasoline expenditures in 2012/2013. When analyzing the impact of these
changes on the lowest income groups, the absolute expenditures on
gasoline are lower than for the average household, due to the fact that
this segment of the population tends to drive fewer miles on average.

      Table V.3.d-2--Impacts on Energy CPI and Gasoline Expenditures for Average and Low Income Households
----------------------------------------------------------------------------------------------------------------
                                                Units              ISU mean estimate      ISU when mandate binds
----------------------------------------------------------------------------------------------------------------
Change in Blended Fuel Price with      $/gallon...............  -$0.002................  -$0.016
 Waiver.
Change in Energy CPI with Waiver.....  Percent................  -0.029%................  -0.225%
Change in Annual Expenditures on       $......................  -$1.98.................  -$17.40
 Gasoline for Average Households with
 Vehicles.
Change in Annual Expenditures on       $......................  -$1.20.................  -$10.49
 Gasoline for Lowest Quintile
 Households with Vehicles.
Change in Gasoline Expenditures on     Percent................  -0.004%................  -0.035%
 Gasoline as a Percentage of Consumer
 Expenditures for Average Households
 with Vehicles.

Change in Gasoline Expenditures as a   Percent................  -0.005%................  -0.048%
 Percentage of Consumer Expenditures
 for Lowest Quintile Households with
 Vehicles.
Change in Gasoline Expenditures as a   Percent................  -0.003%................  -0.028%
 Percentage of Income After Taxes for
 Average Households with Vehicles.
Change in Gasoline Expenditures as a   Percent................  -0.012%................  -0.104%
 Percentage of Income After Taxes for
 Lowest Quintile Households with
 Vehicles.
----------------------------------------------------------------------------------------------------------------

    Some commenters argued to the contrary, claiming that waiving the
RFS would significantly impact the price of fuel. They argue that if
less ethanol is blended into gasoline as a result of a waiver, then the
demand for petroleum-based gasoline would increase, putting an upward
pressure on the world price of oil. In turn, the increase in petroleum
prices would boost overall blended fuel prices. For example, a recent
2012 study by authors at Louisiana State University found that ``* * *
every billion gallons of increase in ethanol production decreases
gasoline price as much as $0.06 cents''.\54\ Other studies such as Du
and Hayes from Iowa State University have suggested that increases in
ethanol production over the last decade have reduced overall blended
fuel prices.\55\ Thus, a waiver which reduced the use of ethanol would
have the effect of raising blended fuel prices. We note that there is
disagreement about the extent of these impacts (see, for example,
Knittel and Smith and others).\56\ In any case, the Du and Hays and
Knittel and Smith studies do not address the specific case at hand, the
fuel price impacts of a waiver of the RFS mandate.
---------------------------------------------------------------------------

    \54\ Marzoughi H. and Kennedy, P. Lynn, ``The Impact of Ethanol
Production on the U.S. Gasoline Market'', Paper presented at the
Southern Agricultural Economics Association Annual Meeting,
February, 2012, available in the docket or at http://EconPapers.repec.org/RePEc:ags:saea12:119752.
    \55\ Xiaodong Du, Dermot J. Hayes, ``The Impact of Ethanol
Production on U.S. and Regional Gasoline Markets: An Update to
2012,'' Center for Agricultural and Rural Development, Iowa State
University, May 2012, available in the docket or at http://www.card.iastate.edu/publications/synopsis.aspx?id=1166.
    \56\ Christopher R. Knittel and Aaron Smith, ``Ethanol
Production and Gasoline Prices: A Spurious Correlation,'' July 12,
2012, available in the docket or at at http://web.mit.edu/knittel/www/papers/knittelsmith_latest.pdf.
---------------------------------------------------------------------------

    As mentioned above, our analysis indicates that it is highly likely
that waiving the RFS mandate would have no impact on ethanol volumes.
The ISU modeling predicts that the average impact across all modeled
scenarios is that waiving the mandate would decrease ethanol demand by
only 40 million gallons, and in 89 percent of the modeled cases the
mandate is not binding. As a simplifying assumption, the ISU model does
not take into account any potential impacts on the global oil markets,
which we believe is a reasonable assumption in this situation given the
small change in ethanol volumes that are projected in this analysis.
Even in the 11 percent of the cases where the mandate was binding,
changes in world oil market would be so small as not to change the
overall conclusions of the study.
(e) Worst Case Scenario
    As a bounding exercise, we also considered a ``worst case''
scenario that could occur if both corn yields and gasoline prices were
at the low ends of the probability distributions used in our modeling.
This worst case example considered the 1 percent of scenarios (five out
of five hundred) where a waiver could have the largest potential
impacts on corn prices. In this worst case scenario, the impact of
waiving the mandate could decrease corn prices by $1.86/bushel, with a
correspondingly larger impact on livestock, food, and fuel prices. It
is highly unlikely that the combination of extremely low corn yields
(approximately 116 bushels per acre) and wholesale gasoline prices
(approximately $1.96/gallon) would occur simultaneously during the
2012/2013 corn marketing year. However, we have included more
information on this worst case scenario in the docket for illustrative
purposes.

4. Overview and Discussion of External Analyses

    Comments submitted to EPA referenced or included a number of
analyses and studies examining the impact of a potential waiver of RFS
standards. These include studies from: Hart Energy, Irwin and Good
(University of Illinois),\57\ Carter, Smith, and Abu-Sneneh (University
of California-Davis),\58\ Purdue University and the Farm Foundation
(Purdue/Farm Foundation), FAPRI-University of Missouri (FAPRI-
Missouri), Babcock-Iowa State, Edgeworth Economics,\59\ the Energy
Policy Research Foundation, Inc. (EPRINC),\60\ Cardno-ENTRIX,\61\ Dr.
Thomas Elam of FarmEcon LLC,\62\ and the Department of Environment,
Food, and Rural Affairs of the United Kingdom government (DEFRA).\63\
Some of the studies focus more on fuel market impacts, while other
studies concentrate specifically on U.S. agricultural sector impacts.
Multiple alterative assumptions and options are explored across the
different sets of analyses of a waiver of the RFS2 volume requirements
making comparison of results challenging. Only a few of the studies are
based on a fully integrated view that directly attempts to link
detailed agricultural commodity markets with fuel market assessments to
assess the impact of implementation of

the RFS volume requirements and a waiver's impacts.
---------------------------------------------------------------------------

    \57\ Irwin, S. and Good, D., ``Ethanol--Does the RFS Matter?''
August 2, 2012, available in the docket or at
www.farmdocdaily.illinois.edu/2012/08/ethanoldoes_the_rfs_matter.html.
    \58\ Comment submitted by Carter, Smith and Abu-Sneneh, EPA-HQ-
OAR-2012-0632-2245.
    \59\ Edgeworth Economics, ``The Impact of a Waiver of the RFS
Mandate on Food/Feed Prices and the Ethanol Industry,'' October 10,
2012, submitted in comments from Growth Energy, EPA-HQ-OAR-2012-
0632-2357.
    \60\ Energy Policy Research Institute Foundation Inc.,
``Ethanol's Lost Promise,'' EPA-HQ-OAR-2012-0632-2231.
    \61\ Urbanchuk, J., Cardno-ENTRIX, ``Impact of Waiving the
Renewable Fuel Standard on Total Net Feed Costs,'' September 2012,
submitted with comments from Renewable Fuels Association, EPA-HQ-
OAR-2012-0632-2218.
    \62\ Elam, T., FarmEcon LLC, ``Ethanol RFS and 2012 Drought
Impact on Virginia Agriculture'', August, 2012, and ``Ethanol RFS
and 2012 Drought Impact on North Carolina Agriculture and
Consumers'', September, 2012. Submitted with comments by the North
Carolina Poultry Federation at EPA-HQ-OAR-2012-0632-2429, and
comments submitted by the Virginia Poultry Federation at EPA-HQ-OAR-
2012-0632-2066.
    \63\ Durham, C., Davies, G., and Bhattacharyya, T., ``Can
Biofuels Policy Work For Food Security? An Analytical Paper for
Discussion,'' June 2012, available in the docket.
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(a) Fuel Market Studies
    Fuel market studies that focus on the impacts of an RFS waiver look
at the economics of blended ethanol. Irwin and Good (University of
Illinois) suggest that a waiver is likely to have little impact on the
liquid fuel supply system. Their analysis rests on their observation
that ethanol is currently the least expensive octane enhancer
available, and that the current liquid fuel supply system in the U.S.
has closely integrated ethanol use as a component to the finished
gasoline supply. Alteration of ethanol's utilization would take time
and require reallocation of infrastructure. Irwin and Good argue that
even if a waiver is granted, only a combination of relatively high
ethanol prices and low wholesale gasoline prices would change current
gasoline and ethanol supply patterns. They estimate that gasoline
prices would have to fall to roughly $69/barrel (West Texas
Intermediate crude) before a shift would occur. Alternatively, corn
prices, which are the key determinate of the price of ethanol, would
have to rise on a sustained basis to over $10/bushel.
    Carter, Smith, and Abu-Sneneh (University of California-Davis)
present analysis using two different assumptions--one in which ethanol
is priced in terms of its energy content, and one in which ethanol is
priced on a volumetric basis. They suggest that the former is more
likely, and that motorists realize the energy penalty associated with
ethanol, but consumers do not have a choice but to accept the
associated energy loss. If motor gasoline is valued for its energy
content, they conclude that ultimately the RFS mandate is ``severely
harming'' motorists. Their analysis suggests that, at current market
prices, octane enhancement alternatives to ethanol would arise in the
medium to long term without the RFS mandate if blended gasoline were
valued based on energy content. They conclude that, if the mandate were
eliminated, lower demand for ethanol would result in lower average corn
prices by up to $0.87/bushel.\64\ They estimate the ``harm'' from the
conventional fuel RFS requirement to be roughly $2.9-$5.9 billion
annually, which they claim could be higher if all the costs associated
with the use of ethanol are accounted for. There are several
limitations of their analysis, however. The authors acknowledge that
their conclusions do not incorporate all of the costs of reduced
ethanol usage. For example, many oil refiners move their products
through common pipelines. Refiners need to coordinate with other users
of the pipeline to ensure that a uniform product enters the pool. The
coordination costs of lower ethanol usage are not estimated.
Furthermore, this study does not provide sufficient data or analysis
upon which we can evaluate their assertion that consumers are currently
aware or modify behaviors in response to the energy penalty associated
with ethanol. Despite the paper's conclusion that the RFS requirements
should be waived, it is important to point out that their second
scenarios supports our assessment that there would be ``no market
response'' to a waiver if finished gasoline is priced on a volumetric
basis. We discuss the basis for our ethanol demand assumptions above,
and we did not see evidence presented in this study to change our
reasoning with respect to how ethanol is priced.
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    \64\ This result refers to removal of the RFS, not from a one-
year waiver of the RFS requirements.
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    A study published by EPRINC, while not attempting to quantify the
impact of a waiver on corn prices, states that a long term waiver would
likely reduce corn prices and ``could free over 18 millions of acres of
existing farm land for the production of crops to meet market needs for
food, livestock feed, exports, or fuel.'' \65\ This study acknowledges,
however, that a near term waiver (6 months to 1 year) would have little
to no effect on corn demand for ethanol production.\66\ In concluding
that the RFS mandate increases corn costs by $0.87/bushel, Carter,
Smith, and Abu-Sneneh (University of California-Davis) cite the EPRINC
study when discussing the ability of refiners to decrease ethanol
blending in the gasoline pool in the medium to long term. The studies
here discuss the ability of refiners to decrease ethanol blending over
the medium to long term, but they do not discuss whether the economics
of ethanol and gasoline production would be such that there would be an
economic incentive to do so. As discussed above, whether refiners would
move away from ethanol blending if they had the opportunity to do so is
influenced by a variety of factors, including economic ones. Examining
the impacts of a medium to long term waiver is a significant
distinction between these two studies and the analysis performed by
EPA. EPA's authority is limited to granting a one year waiver, with
potential for extending the waiver, a fact specifically noted by
EPRINC.\67\ For a further discussion of this issue see Section VI.7(b).
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    \65\ EPA-HQ-OAR-2012-0632-2231.
    \66\ EPA-HQ-OAR-2012-0632-2231.
    \67\ EPA-HQ-OAR-2012-0632-2231.
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    As discussed above, based upon a review of multiple external
analyses including the studies cited above, consultation with DOE, and
review of comments that we received, and given the circumstances and
scenarios examined in our analysis, we believe that it would be highly
unlikely that refiners and blenders would seek to replace ethanol in
the time frame analyzed (i.e., one year) even if the RFS requirement
were reduced or waived over the 2012/2013 corn marketing year. Ethanol
blending is an economically beneficial option for refiners at this
time, given the price of ethanol and the cost of production of finished
gasoline. That is not expected to change during the time period at
issue. In addition, even if it were economically advantageous to do so,
previous investments that have been made to configure the fuel supply
production and distribution systems (e.g., blending terminals) to
incorporate ethanol are costs that have already been expended, and any
change in utilization of these investments could take time and require
reallocation of infrastructure. In addition, options or opportunities
to make infrastructure changes may be technically and economically
limited in the short term. Refiners are unlikely to make the changes to
allow for reduced ethanol blending, such as modifying refining
operations to produce higher octane blendstocks and draining storage
tanks, if they do not believe these changes will be economically
beneficial in the medium to long term, though this could differ in a
scenario differing from that analyzed here with respect to oil prices,
rollover RINs, and other key parameters. Fuel supply investments also
tend to involve large capital expenditures. Fuel contractual
obligations may be set over extended periods of time and could be
difficult to alter in the short run (e.g., six months to a year). Also,
the costs of using ethanol replacements, in terms of using different
octane additives or even different sources of finished gasoline,
including imports of finished gasoline to the U.S., would likely be
significant in the near term.\68\
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    \68\ See Morgan Stanley, August 7, 2012.
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    Further, assuming that U.S. agricultural markets return to pre-
drought conditions in the following years (e.g., 2013/14 and beyond)
and the blending of ethanol into the gasoline pool continues to be a
profitable practice, it would not appear to be in a

refiner's economic interest to make changes in the fuel supply system.
This would especially be the case if EPA were to not renew a waiver
after one year, since refiners would need to quickly undo all of the
changes they had just made in order to comply with the RFS in 2014.
Carter, Smith, and Abu-Sneneh acknowledge the costs of switching back
and forth to different levels of ethanol usage between 2013 and 2014
could be high.
    EPA further received comment that the RFS is saturating the ethanol
market in the U.S.; commenters point to the large corn ethanol exports
in 2011 as evidence that blending ethanol into gasoline in the U.S. is
not a profitable practice.\69\ We do not agree that the significant
corn ethanol exports in 2011 indicate that blending ethanol into
gasoline was not profitable in the U.S. and driven by the RFS. In 2011
the blending of ethanol into gasoline exceeded the RFS mandates by a
wide margin. The most likely reason for this is that refiners and
blenders found the blending of ethanol to be a profitable practice. Low
prices for corn ethanol RINs appear to support this. We believe the
large volume of exported ethanol in 2011 is yet more evidence that, at
least in 2011, ethanol production was the highest value use for corn.
RINs for ethanol that is exported outside the U.S. must be retired when
the fuel is exported; we therefore believe it is highly unlikely that
the RFS program encouraged this practice and that converting corn into
ethanol for export was simply more profitable than selling it into the
food or feed markets.
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    \69\ National Chicken Council comments, EPA-HQ-OAR-2012-0632-
1994.
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    Comments also cited work done by EPRINC that shows that increased
ethanol blending has not lead to decreased crude oil imports, but only
to changes in the end uses of the crude oil as evidence that waiving
the RFS would lead directly to reduced corn ethanol production.\70\
They cite the EPRINC study concluding that any decrease in ethanol
blending could be made up for with additional gasoline from existing
refineries without additional crude oil imports, but rather through
shifting of refined crude oil products. While this may be the case we
note that any increased gasoline production would correspond in a
decrease in other refined products, most likely diesel fuel as noted in
the EPRINC study. We believe that if these changes were profitable
refiners would already be looking to minimize ethanol blending, which
has not been the case in the past several years. We also note that the
EPRINC study also states that a short term waiver would have little
effect on corn demand for the production of ethanol.
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    \70\ EPA-HQ-OAR-2012-0632-1994.
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(b) Agricultural Market Studies
    Several studies focus on the agricultural sector impacts of a
possible waiver of the RFS volume requirements. A number of these
studies provide quantitative estimates of impacts of a waiver on corn
prices and feed prices. Where commenters provided estimates of impacts
to a State or a particular industry sector, such estimates were
frequently based on results from the studies discussed below.\71\ In
many cases, the studies below present a range of estimates for impacts,
and commenters cited estimates from both the low and, more frequently,
the high ends of those ranges. In general, these agricultural sector
studies are directionally consistent with EPA's analysis using the ISU
model. In fact, the range of estimates provided in the Purdue/Farm
Foundation study (described in more detail below), bracket the results
that we present on the average impacts of a waiver and the impacts when
the mandate is binding. Similarly, all of the referenced studies cite
the importance of the same key assumptions that we have discussed
previously, namely the amount of carryover RINs that are available and
the degree of flexibility available to the refining industry over a one
year period. As discussed further below, EPA believes that our
technical analysis uses the most up-to-date data on available RINs and
takes into account important information on refiner flexibility that
these other studies treat only qualitatively or not at all.
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    \71\ Comments submitted by, for example, the Virginia Poultry
Federation and the North Carolina Poultry Federation included
studies by FarmEcon LLC (Elam), which examined changes in feed
prices and effects on revenue if corn prices were to decrease, due
to a waiver, by $1.14 per bushel. The estimate of a $1.14 decrease
is from the Purdue/Farm Foundation study. It is the difference in
corn prices between a case with 13.8 billion gallons of corn ethanol
production and a case with 10.8 billion gallons of production. For
reasons discussed elsewhere (see, for example, sections V.1.e and
V.2), we believe that ethanol production in the event of a waiver is
unlikely to decline by 3 billion gallons. We also project that corn
ethanol production in 2012/13 without a waiver is most likely to be
around 12.48 billion gallons (see Section V.2), less than the
projection used by FarmEcon LLC. See, for example analysis prepared
for the North Carolina Poultry Federation at EPA-HQ-OAR-2012-0632-
2429, and comments submitted by the Virginia Poultry Federation at
EPA-HQ-OAR-2012-0632-2066.
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    FAPRI--Missouri finds that ethanol production falls by roughly 160
million gallons from eliminating the ``conventional gap'' which they
define as ``the maximum amount of conventional (corn starch) ethanol
that can be counted towards the mandate''. Less corn is needed to
produce ethanol and, as a result, average corn prices decrease by
roughly $0.04 cents per bushel. Lower average corn prices means lower
feed costs for livestock producers, though the lower corn prices are
partially offset by higher soybean meal and distillers grain prices.
These feed price changes lead to an increase in net returns to meat
production and, as a result, meat production increases and meat prices
decrease. The FAPRI-Missouri results, like the EPA results presented
above, predict a fairly modest impact on corn prices from a waiver of
the 2013 conventional mandate.\72\
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    \72\ ``[R]educing the overall RFS has a small negative effect on
the corn price in 2012/13 relative to the baseline because overall
ethanol use and production are projected to be motivated mostly by