for 2014 compliance, a waiver from statutory applicable volumes
would still be required for 2014.
    \34\ Non-ethanol supply other than BBD was 238 mill gal in 2013
and 175 mill gal in 2014. Details of actual supply in 2013 and 2014
can be found in the docket.
---------------------------------------------------------------------------

    The statute sets targets of 20.5 billion gallons of renewable fuel
in 2015 and 22.25 billion gallons of renewable fuel in 2016. We have
determined that these volumes cannot be achieved under even the most
optimistic assumptions given current circumstances. To make this
determination, we first assumed that every gallon of gasoline would
contain 10% ethanol, and also assumed production and use of BBD volumes
at the highest historical level, which occurred in 2014. When these
supplies of renewable fuel are taken into account, a significant
additional volume of renewable fuel would still be needed for the
statutory volume targets to be met.

 Table II.A.5-1--Additional Volumes Needed To Meet Statutory Targets for
                          Total Renewable Fuel
                  [Million ethanol-equivalent gallons]
------------------------------------------------------------------------
                                                    2015         2016
------------------------------------------------------------------------
Statutory target for total renewable fuel.....       20,500       22,250
Maximum ethanol consumption as E10 \a\........      -13,780      -13,690
Historical maximum biomass-based diesel supply       -2,500       -2,500
 \b\..........................................
Additional volumes needed.....................        4,220        6,060
------------------------------------------------------------------------
\a\ Derived from projected gasoline energy demand from EIA's Short-Term
  Energy Outlook (STEO) from May 2015.
\b\ Represents the 1.63 billion gallons of biodiesel and renewable
  diesel supplied in 2014.

    Based on the current and near-future capabilities of the industry,
we expect that only a relatively small portion of the additional
volumes needed would come from non-ethanol cellulosic biofuel, non-
ethanol advanced biofuels other than BBD, and non-ethanol conventional
renewable fuels. In total these sources could account for several
hundred million gallons, as demonstrated by supply of these sources in
2013 and 2014.\34\ The more likely sources of additional renewable fuel
that could fulfill the need for 4.22 billion gallons in 2015 or 6.06
billion gallons in 2016 are BBD in addition to the 1.63 billion gallons
supplied in 2014, or ethanol consumed as higher ethanol blends such as
E15 and E85. In either case, more than 70% of those additional ethanol-
equivalent volumes

would need to be advanced biofuel in order to meet the statutory volume
requirement for advanced biofuel.\35\
---------------------------------------------------------------------------

    \35\ Assumes that all ethanol consumed as E10 in Table II.A.5-1
is conventional (non-advanced).
---------------------------------------------------------------------------

    If all of the additional volumes needed were biodiesel, the
industry would need to supply a total of about 4.5 billion gallons in
2015 and 5.7 billion physical gallons in 2016. There currently exists
only about 2.8 billion gallons of registered biodiesel production
capacity in the U.S., though total production capacity considering
unregistered facilities may be as high as 3.6 billion gallons. In
addition to expanding the registered production capacity, the industry
would need to restart all idled facilities, secure sufficient
feedstocks including diverting them from current uses, implement
significantly expanded distribution, blending, and retail sales
infrastructure, and establish new contracts for distribution and sales.
Based on current market circumstances, including the biodiesel sector's
current production capacity and broader infrastructure limitations, we
do not believe that an expansion in production and use of this
magnitude is possible in 2015 or 2016. Just as importantly, volumes on
the order of 4.5 billion gallons in 2015 and 5.7 billion physical
gallons in 2016 are far in excess of what could actually be consumed in
this short timeframe. This volume of BBD would constitute about 8% of
the diesel pool in 2015 and 10% in 2016.\36\ Although most medium and
heavy-duty engine manufacturers warrant the use of blends up to B20 in
their more recent models, some light-duty engine manufacturers do not,
and the majority of highway and nonroad diesel engines in use today are
warranted for no more than 5% biodiesel. Also, biodiesel concentrations
in the winter months are sometimes kept to lower levels by engine
owners due to cold weather operability and storage concerns. The
National Biodiesel Board has extensive efforts underway working with
the vehicle and engine manufacturers to continue to expand product
offerings capable of operating on B20, working with their membership to
improve fuel quality, expanding infrastructure to address cold
temperature issues, and working with dealers and technicians to clear
away obstacles standing in the way of expanding biodiesel acceptance in
the marketplace.\37\ There are also efforts to increase the use of
biodiesel in heating oil. These will continue to bear fruit, allowing
the biodiesel volume to continue to rise over time, but not to the
levels that would be needed in 2015 and 2016 if the additional volumes
shown in Table II.A.5-1 were met with biodiesel.
---------------------------------------------------------------------------

    \36\ Based on EIA's May 2015 Short-Term Energy Outlook (online
interactive table), nationwide diesel consumption is projected to be
57.5 bill gal in 2015 and 58.9 bill gal in 2016.
    \37\ ``NBB Technical Update for EPA, April 30, 2015'' in docket
EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    Alternatively, if all of the additional volumes were ethanol, the
U.S. would need to consume volumes of E85 far higher, in our
estimation, than the market is capable of supplying: in 2015 the
required volume of E85 would need to be about 6.4 billion gallons,
while in 2016 it would need to be about 9.2 billion
gallons.38 39 These volumes are 30-50 times higher than
actual E85 consumption in 2014, and would require many of those FFVs
that do not have an E85 retail outlet anywhere close by to use it.\40\
Moreover, a majority of this additional ethanol would need to be
advanced, and currently the only substantial source of advanced ethanol
is imported sugarcane ethanol from Brazil which has recently increased
its own ethanol use requirements. In order to meet the statutory volume
requirement for advanced biofuel, the U.S. would need to import at
least 3.0 billion gallons in 2015 and 4.7 billion gallons in 2016.\41\
Such volumes would be on the order of ten times higher than actual
annual imports in the past. The highest volume of Brazilian sugarcane
ethanol that has ever been imported was 680 million gallons in 2006,
and in recent years ethanol imports have been considerably lower.\42\
In 2014, imports were only 64 million gallons.\43\ While production of
sugarcane ethanol in Brazil has increased, demand for ethanol in Brazil
has also increased. For instance, Brazil recently increased the
required ethanol content of gasoline from 25% to 27.5%.\44\ As a
result, we believe that exports of 3.0--4.7 billion gallons from Brazil
to the U.S. in the 2015--2016 timeframe are infeasible.
---------------------------------------------------------------------------

    \38\ In general when discussing efforts to increase the use of
ethanol beyond the blendwall we focus on the volume of E85 that is
consumed, since volumes of E15 are likely to be small in 2016. See
additional discussion of this issue in Section II.D.1 below.
    \39\ Due to relative ethanol content and the fact that E85
displaces some E10, each gallon of ethanol above the E10 blendwall
requires the use of 1.51 gallons of E85.
    \40\ Further discussion of the E10 blendwall can be found in
Section II.D.1.
    \41\ The balance of the additional volumes needed, as shown in
Table II.A.5-1, would most likely be corn-ethanol.
    \42\ 42 Ethanol import data from EIA, representing imports
directly from Brazil and indirectly through the Caribbean Basin
Initiative (CBI) and the Central America Free Trade Agreement
(CAFTA). http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epooxe_im0_mbbl_m.htm.
    \43\ Based on import data from EMTS.
    \44\ ``Brazil Hikes Ethanol Blend in Gasoline to 27%,''
DownstreamBusiness.com, March 12, 2015.
---------------------------------------------------------------------------

    The additional volume of 4.22 billion gallons in 2015 or 6.06
billion gallons in 2016 could also be satisfied through production and
use of a combination of BBD and E85. However, even in this case the
volumes are untenable. Figure II.A.5-1 shows the range of possibilities
for both 2015 and 2016.

[GRAPHIC] [TIFF OMITTED] TP10JN15.002

We recognize that the market could potentially reach higher total
volumes than those reached in 2014 by using a combination of biodiesel
and E85. Even so, we believe that the market could not reach the
volumes specified in the statute. For instance, one possible
combination for 2016 would be 4.5 billion gallons of E85 and 3.7
billion gallons of biodiesel. While both of these volumes are
considerably less than the maximums that would be required if the
market supplied only one or the other, nevertheless both levels appear
to be beyond the reach of the market under current circumstances. Based
on this assessment, we do not believe that the statutory volumes for
advanced biofuel and total renewable fuel can be met in 2015 or 2016.

B. Overview of Approach to Determining Volume Requirements

    Although the statute does not require that EPA issue a waiver of
the statutory applicable volumes when EPA determines that there is an
inadequate domestic supply of renewable fuel, we are in fact proposing
to do so.\45\ However, we are proposing to exercise that authority only
to the extent necessary to remove the inadequacy in supply. That is,
our objective in exercising the general waiver authority is to set the
volume requirements at the boundary between an adequate domestic supply
and an ``inadequate domestic supply.'' \46\ One way of expressing this
objective is to say we are seeking to determine the maximum volumes of
renewable fuel that are achievable in light of supply constraints. This
is a very challenging task not only in light of the myriad complexities
of the fuels market and how individual aspects of the industry might
change in the future, but also the fact that we cannot precisely
predict how the market will respond to the volume-driving provisions of
the RFS program. Thus the determination of the maximum achievable
volumes is one that we believe necessarily involves considerable
exercise of judgment. To this end, we are proposing ``maximum
achievable'' volumes of advanced biofuel and total renewable fuel in
this package that reflect our judgment as to where the intersection
between adequate domestic supply and inadequate domestic supply might
fall. There are a number of indications, described below, that the
volumes we are proposing today represent a reasonable estimate of the
maximum volumes achievable.
---------------------------------------------------------------------------

    \45\ 211(o)(7)(A) says, ``The Administrator . . . may waive the
requirements . . .'' [emphasis added]
    \46\ As discussed in Section II.A, EPA has considerable
discretion in exercising the cellulosic waiver authority, and is not
constrained to consider any particular factor or list of factors in
doing so. Nevertheless, EPA is proposing to base its exercise of the
cellulosic waiver authority on the same general considerations
justifying its use of the general waiver authority--availability of
renewable fuel and the legal and practical constraints on their
supply to vehicles and other qualifying uses. We invite comment on
this approach.
---------------------------------------------------------------------------

    In the November 2013 NPRM we projected achievable volumes by
following an approach wherein we first projected future volumes for
each of the various components of the renewable fuel pool and then
combined them using a statistical approach to arrive at overall totals.
By considering each possible source of renewable fuel in isolation, we
had intended to reduce the generation of the proposed standards to a
collection of more easily estimated components. We acknowledged that
each source of renewable fuel was not independent from other sources
under the influence of the RFS program, but we nevertheless treated
them as such. However, because the projected volume of each individual
source was uncertain, there needed to be flexibility in the proposed
volume requirements so that excesses of one source could compensate for
potential shortfalls in another source. To account for this fact, and
also for the fact that the uncertainty associated with each individual
source was compounded when those sources were added together, we
targeted the mean of the projected range of potentially achievable
volumes rather than some higher value as the basis for the proposed
volume requirements.
    After further consideration, we believe that the approach we took
in the November 2013 NPRM underestimated achievable volumes and did not
fully account for the potential of the market to respond to the
standards that we set. We have determined that considering each
potential source of renewable fuel in isolation, adding those sources
together, and then using the mean of the resulting range was more
suited to taking a neutral aim at accuracy of supply, rather than
estimating the maximum volumes that can be achieved from a responsive
market as implicitly required by the statute. The applicable

volumes established by Congress in the statute were very ambitious, and
even in cases where we have determined that the statutory volumes
cannot be met we are under an obligation to set volume requirements
that are achievable but still ambitious. Therefore, for this proposal
we have found it more straightforward and more in keeping with the
statute's goals to estimate the total maximum achievable volumes for
both advanced biofuel and total renewable fuel based on the market
potential for overcoming the various constraints at play. In this
process was have considered the contributions from individual sources
of renewable fuel, including E15 and E85, in the aggregate rather than
individually, and in the context of a market that is responsive to the
standards that we set.
    Section II.A above lays out the rationale and justification for
exercising our waiver authority under the Clean Air Act's relevant
provisions. In determining the specific volumes to propose, we have
considered not only the current circumstances and limitations in the
ability to supply renewable fuels to the consumer, but also historic
renewable fuel growth patterns and maximum supplies, the intent of
Congress to use the RFS program to drive growth in renewable fuel use,
and our assessment (based on years of regulating the fuel production
and distribution industry) of the ability of the RFS program to effect
changes that will result in growth. As a result, our proposed approach
envisions growth in supply beyond historical levels as envisioned by
the statute. This section provides an overview of our approach to
determining the proposed volume requirements.
1. Fulfilling Congressional Intent To Increase Use of Renewable Fuels
    Although there is scant legislative history for the Energy
Independence and Security Act (EISA) to confirm the facts that were
considered by Congress at the time of enactment, we believe that when
Congress specified the renewable fuel volume targets that the RFS
program was to attain, that it likely was with the understanding that
the growth reflected in the statutory tables of applicable volumes
would be beyond any previously demonstrated ability of the industry to
produce, distribute, and consume renewable fuels. For example, the
annual average growth reflected in the statutory volumes for the time
period between 2009 and 2022 is 1.6 billion gallons per year for
advanced biofuel and 1.9 billion gallons per year for total renewable
fuel. However, in the period 2001 to 2007 leading up to enactment of
EISA, annual average growth rates were lower: 0.8 billion gallons per
year for ethanol, which was not advanced biofuel, and 0.07 billion
gallons per year for biodiesel. The supply of other renewable fuels
during this timeframe was essentially zero. In other words, Congress
set targets that envisioned growth at a pace that far exceeded
historical growth and prioritized that growth as occurring principally
in advanced biofuels (contrary to historical growth patterns). It is
apparent, therefore, that Congress intended to require changes that
would be unlikely to occur absent the new program.
    Moreover, it is highly unlikely that Congress expected the very
high volumes that it specified in the statute to be reached only
through the consumption of E10; indeed the statute does not explicitly
require the use of ethanol at all. At the time EISA was passed in 2007,
EIA's Annual Energy Outlook for 2007 projected that 17.3 billion
gallons of ethanol is the maximum that could be consumed in 2022 if all
gasoline contained E10 and there was no E0, E15, or E85.\47\ However,
17.3 billion gallons is far less than the 35 billion gallons of
renewable fuel other than BBD that Congress targeted for use in 2022.
Thus, if the statutory targets were to be achieved, 17.7 billion
gallons of renewable fuel would need to be consumed in 2022 either as
higher level ethanol blends (E11--E85), or as non-ethanol fuels. Such
levels were far beyond the industry's abilities at the time of EISA's
enactment, strongly suggesting that Congress expected the RFS program
to compel the industry to make dramatic changes in a relatively short
period of time.
---------------------------------------------------------------------------

    \47\ Assumes that AEO2007's 2022 demand for gasoline energy was
fulfilled entirely by E10. AEO2007 however, projected that
considerably less gasoline used in 2022 would be E10. We have
converted the projected 2022 gasoline energy demand into an
equivalent volume of E10 to determine the maximum volume of ethanol
that could have been consumed in 2022, based on the AEO2007, if all
gasoline was E10.
---------------------------------------------------------------------------

    Congress did not explicitly indicate, in EISA or in any other
document associated with it, the sort of changes that may have been
expected to occur to reach 36 billion gallons by 2022. Instead, there
was an implicit assumption that the market would respond appropriately
to overcome those obstacles to significant growth that might exist.
Today we know that the changes needed to significantly expand renewable
fuel use fall into a select number of areas, including:
 Increased production and/or importation of ethanol, primarily
advanced ethanol
 Increased use of E15 in model year 2001 and later vehicles
 Increased use of E85 or other higher level ethanol blends in
flex-fuel vehicles (FFVs)
 Increased production and/or importation of non-ethanol
biofuels (e.g., biodiesel, renewable diesel, renewable gasoline, and
butanol) for use in conventional vehicles and engines
 Increased use of biogas in CNG vehicles
 Increased use of renewable jet fuel and heating oil
 Increased use of non-food based feedstocks
 Co-development of new technology vehicles and engines
optimized for new fuels

In the near term we expect that increases in E85 and biodiesel will
dominate efforts to increase the use of renewable fuel, with smaller
roles played by other avenues (e.g., increased E15 use). In the longer
term, sustained ambitious volume requirements are necessary to provide
the certainty of a guaranteed future market that is needed by
investors; the development of new technology won't occur unless there
is clear profit potential, and it requires multiple years to build new
production, distribution, and consumption capacity. We believe that the
approach we take to setting the standards must be consistent with
Congress' clear goal of compelling the industry to make dramatic
changes to increase renewable fuel use. To this end, the approach
presented in this action makes use of the statutory waiver authorities
only to the degree necessary to ensure that the resulting volumes of
advanced biofuel and total renewable fuel are within reach of the
market.
    We believe that over time use of both higher level ethanol blends
and non-ethanol biofuels can and will increase, consistent with
Congress' intent in enacting EPAct and EISA. As stated above, while
Congress provided waiver authority to account for supply challenges, we
do not believe that Congress intended the renewable fuels market to be
ultimately constrained by the E10 blendwall or any other particular
limitation that may exist in supplying renewable fuels. The fact that
Congress set volume targets reflecting increasing and substantial
amounts of renewable fuel use clearly signals that it intended the RFS
program to create incentives to increase renewable fuel supplies and
overcome supply limitations. Notwithstanding these facts,

Congress also authorized EPA to adjust statutory volumes as necessary
to reflect situations where only partial progress had been made towards
eliminating supply limitations, as well as to address situations
involving unexpected severe economic or environmental harm resulting
from program implementation.
2. RFS Program Mechanisms and Their Role in Supporting Growth in
Renewable Fuel Use
    Congress charged EPA with implementing a program whose explicit
goal is increased renewable fuel use over time, and EPA, in developing
an implementation framework, sought to achieve this goal in a fashion
that maximizes flexibility and the power of the marketplace, while at
the same time recognizing the complex and disaggregated structure of
the fuel production and distribution systems. EPA created a system
whereby renewable fuel producers generate RINs for each gallon of
renewable fuel produced. These RINs, under certain conditions, can be
separated from the renewable fuel and bought and sold by registered
parties. They are ultimately used by obligated parties as a means of
demonstrating compliance with their renewable volume obligations. In
establishing a compliance approach based on RINs, EPA sought to
encourage efficient, market-based solutions to the challenges
associated with increasing the production, distribution, and
consumption of renewable fuels.
    The RIN system is the mechanism established by EPA for obligated
parties to demonstrate compliance with the standards, and is designed
to provide obligated parties flexibility in the means they use to
demonstrate compliance. The RFS program, acting through the mechanism
of the RIN system, operates to provide an incentive for renewable fuel
producers to increase the production of renewable fuels by, in effect,
increasing the price blenders and obligated parties are willing to pay
for renewable fuels. Under the RFS program, renewable fuel producers
sell not only the fuels they produce, such as ethanol or biodiesel, but
also the RINs that are ``assigned'' to the renewable fuel. As the
demand for RINs increases, the willingness of the market to pay for
renewable fuels and the RINs assigned to them also increases. When
working efficiently, this system allows renewable fuel producers to
continue to profitably market renewable fuel at times that would
otherwise result in negative margins, such as when the price of
feedstock or other inputs are unusually high, the price of the
petroleum fuels that renewable fuels replace is unusually low, or when
market demand for renewable fuel is low. In this way the RFS program,
through the RIN system, also assists renewable fuel producers seeking
to finance the construction of new facilities, especially facilities
capable of producing cellulosic or advanced biofuels, by providing
certainty that there will be a market for increasing volumes of
renewable fuels.
    The RIN system should also incentivize the development of the
renewable fuel distribution infrastructure by helping to decrease the
net cost of renewable fuels. As mentioned, when fuel blenders or
obligated parties purchase renewable fuel directly from renewable fuel
producers this fuel generally comes with an assigned RIN. When a fuel
blender blends the renewable fuel with petroleum-based fuel to create
finished transportation fuel, the blender is able to separate and sell
the RIN that was previously assigned to the renewable fuel. Whatever
price the fuel blender or obligated party receives for the RIN can be
thought of as reducing the net purchase price of the renewable fuel.
For example, if a fuel blender purchases a gallon of ethanol with an
attached RIN for $1.50 and, after blending the ethanol to create
transportation fuel, sells the RIN for $0.50, the blender has
effectively paid $1.00 for the gallon of ethanol without the RIN. The
higher the price received for the RIN, the lower the effective cost of
the renewable fuel. Higher RIN prices therefore enable fuel blenders to
market finished fuels that contain renewable fuel components at lower
prices by allowing them to purchase renewable fuels for a lower
effective price. A fuel blender can choose not to reduce the price of
the blended fuel and keep the value associated with the RIN as profit,
or they can attempt to increase their market share by passing along the
lower effective purchase price of the renewable fuel to the customers
in the price of their fuel blends.\48\ By increasing the potential
profitability of blending renewable fuels, higher RIN prices can
incentivize the build out of the infrastructure necessary to blend and
distribute renewable fuel blends as parties seek to enter or expand
their position within this market.\49\
---------------------------------------------------------------------------

    \48\ In competitive markets, such as the market for E10, fuel
blenders must reflect the lower effective prices of renewable fuel
(ethanol) in the price of the E10. For emerging markets, such as
E85, there may be greater opportunities for fuel blenders to
withhold profit due to a lack of market competition until such a
time as other parties enter the E85 market.
    \49\ Although not directly relevant to the establishment of the
proposed standards, for further background information on EPA's
understanding of the RIN and renewable fuel market dynamics see ``A
Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their
Effects,'' Dallas Burkholder, Office of Transportation and Air
Quality, US EPA. May 14, 2015, EPA Air Docket EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    Finally, the RFS program, operating through the RIN system should
increase the consumption of renewable fuels by ultimately decreasing
the cost of renewable fuel blends to consumers relative to the cost of
fuel blends that do not contain renewable fuels. RIN prices can be used
by blenders to decrease the effective cost of renewable fuel used to
create transportation fuel. As more market participants enter the
renewable fuel blending and distribution marketplace, and consumers
learn to accurately compare the cost of E10 and other higher-level
ethanol blends, over some period of time the competition among
renewable fuel blenders and distributors should result in a greater
portion of the reduced effective cost of renewable fuel blends enabled
by the sale of the RIN to be passed on to fuel consumers.
Transportation fuel that contains renewable fuels should then reflect
these cost reductions relative to transportation fuel containing lower
volumes of renewable fuel (or no renewable fuel) in proportion to their
renewable fuel content; transportation fuel containing a greater
percentage of renewable fuels should be priced lower than
transportation fuel containing a lesser percentage of renewable fuel.
Motivated by the lower fuel prices for transportation fuel containing
greater renewable fuel content (such as E85) relative to fuels
containing less renewable fuel (such as E10), consumers will then
choose to purchase increasing volumes of renewable fuel. If the price
discount for renewable fuels is great enough for a long enough period
of time, they may also be motivated to purchase vehicles capable of
utilizing fuels containing higher percentages of renewable fuels, such
as flexible fuel vehicles.
    While economic theory and the illustration in the preceding
paragraphs support the idea that RINs can serve as a mechanism to
increase the production, distribution, and consumption of renewable
fuels, it is important to note that this is dependent on the
marketplace working efficiently. In reality, there is a timing
component associated with each of the steps outlined above. Renewable
fuel producers and investors must see a sustained, profitable market
for renewable fuels before they will be willing to invest in the
construction of additional fuel production capacity,

which may take years to construct and bring online. Fuel blenders and
distributors must see sustained profit opportunities before they are
willing to invest in new infrastructure to increase their capacity to
blend and distribute renewable fuels. Market competition must increase
before fuel blenders and distributors are willing to pass along the
reduced effective price of renewable fuel to consumers. New fueling
infrastructure may need to be built to facilitate the sales of fuels
containing an increasing percentage of renewable fuel. Consumers will
need to learn to be able to identify value in fuel blends containing
higher proportions of renewable fuels, as well as their vehicle's
ability to handle these fuel blends and where they are available for
purchase.
    This suggests that while the RFS program established by EPA can be
effective at increasing the renewable content of transportation fuels
over time, it likely cannot substantially increase the available supply
of renewable fuels to consumers to the volumes envisioned by Congress
in the short term. The program, as Congress clearly indicated, is
intended to grow over a period of years. EPA remains committed to
promoting renewable fuel production and use in the United States, and
we believe the RFS program will be effective in achieving this end. Due
to the current state of the renewable fuel production, distribution,
and consumption marketplace, we believe the required volumes of
renewable fuel must be reduced below the statutory levels in the
immediate near term. An approach that provides volume targets that
balances aggressive growth with marketplace realities is necessary, is
consistent with the statute and Congressional intent, and is the
intended outcome of this proposed action.
3. Current and Future Shortfalls in Supply
    In 2013 and 2014, the market supplied less renewable fuel to the
domestic transportation sector than the statutory targets for those
years. While the standards for 2013 were not finalized until August 15,
2013 and the standards for 2014 have not yet been finalized, we do not
believe that these delays are the only reasons that actual supply fell
short of the statutory volumes. Shortfalls in production and import
capability of non-ethanol renewable fuels and constraints on the supply
of ethanol to vehicles were also significant factors in not meeting the
statutory volume targets, and we expect these factors to continue in
2015 and beyond.
    Supplies of BBD and advanced biofuel in 2013 exceeded the statutory
requirements for these two categories of renewable fuel by a wide
margin. In addition, there was a record high of about 250 million
ethanol-equivalent gallons of non-advanced biodiesel and renewable
diesel imported in 2013. However, supply of total renewable fuel fell
far short of the statutory target of 16.55 billion gallons, reaching
only 15.54 billion gallons. The most likely source of additional
renewable fuel that could have made it possible to reach a total of
16.55 billion gallons was corn-ethanol. Consuming an additional 1
billion gallons of ethanol would have required consumption of E85 to
increase to more than 1.5 billion gallons.\50\ The fact that the market
only achieved about 130 million gallons of E85 in 2013 despite
substantial increases in the production and import of non-ethanol
blends and the substantial draw-down in the bank of carryover RINs
indicates that E85 consumption was constrained.\51\ We believe these
constraints included those related to infrastructure (e.g.,
availability of E85 at retail and the number of FFVs in the fleet) and
poor pricing of E85 relative to E10 that fails to overcome the lower
energy content of E85 and any inclinations that FFV owners may have to
opt to use gasoline.\52\
---------------------------------------------------------------------------

    \50\ E85 is assumed to contain 74% ethanol, consistent with the
concentration assumed by EIA. Each gallon of E85 displaces some E10.
The net result of these two factors is that every gallon of ethanol
that must be consumed above the E10 blendwall requires 1.51 gallons
of E85.
    \51\ Because the applicable volume requirement for total
renewable fuel in 2013 was 16.55 bill gal, but actual supply was
only 15.54 bill gal, there was a shortfall of about 1 bill RINs
needed for compliance.
    \52\ For a further discussion of the ability of the RFS program,
acting through the RIN system, to impact E85 infrastructure and
pricing as well as the limitations of the RFS program see Section
II.B.2.
---------------------------------------------------------------------------

    A similar situation existed in 2014, except that both the advanced
biofuel and total renewable fuel volumes supplied fell short of the
statutory volume targets. We recognize that the market may have been
influenced by the proposed volume requirements for 2014 specified in
the November 2013 Notice of Proposed Rulemaking (NPRM) which included
proposed reductions from the statutory levels.\53\ However, there are
reasons to believe that the November 2013 NPRM was not the only factor
resulting in actual supply falling short of the statutory volumes. Not
only did we request comment on volume requirements higher than those we
proposed, but there was an inherent possibility that we might finalize
the statutory volumes for 2014. Indeed, we received over 340,000
comments on the November 2013 NPRM, many of which requested that we set
the 2014 volume requirements at the statutory levels. We believe that
obligated parties would likely act prudently to minimize the risk that
they would be out of compliance regardless of the outcome in the final
rule. The fact that total demand for gasoline was about the same in
2014 as it was in 2013 suggests that the E10 blendwall also played a
role in limiting the supply of renewable fuel. Thus the facts suggest
that factors other than the NPRM were principally responsible for
renewable fuel use being considerably below the statutory volume
levels. In particular, we believe these factors include insufficient
production and import of non-ethanol renewable fuels, and constraints
on the supply of ethanol to vehicles that can consume it.
---------------------------------------------------------------------------

    \53\ 78 FR 71732, November 29, 2013.
---------------------------------------------------------------------------

    Our view that factors other than the November 2013 NPRM were
responsible for renewable fuel use being considerably below the
statutory volume levels in 2014 is also supported by the fact that the
supply of advanced biofuel was insufficient to fill the gap created by
the shortfall in cellulosic biofuel. Under the statute, cellulosic
biofuel was intended to fill 1.75 billion gallons out of the 3.75
billion gallons advanced biofuel applicable volume target. In reality,
cellulosic biofuel was only 0.03 billion gallons. The market did
increase the supply of other advanced biofuel, but those increases were
insufficient to reach the statutory volume target. Specifically, the
market supplied 1.63 billion gallons (2.5 billion ethanol-equivalent
gallons) of BBD but only 143 million gallons of other advanced biofuel.
We expect the gap created by the shortfall in cellulosic biofuel to
widen further in 2015 and 2016 as the statutory volume targets quickly
increase but the supply potential of the market increases at a slower
rate.
    Supply of ethanol in higher level ethanol blends, primarily E15 and
E85, also fell far short of what would have been needed to reach the
statutory volumes of total renewable fuel in 2014. While the total
volume of ethanol that could in theory have been consumed in 2014 in
the form of E15 and E85 was about 26 billion gallons \54\ based on the

consumption capacity of vehicles that are legally permitted to use
these fuels, constraints such as those imposed by blending and
dispensing infrastructure and poor pricing relative to E10 resulted in
only about 100--200 million gallons of ethanol actually being consumed
as E15 and E85 in 2014.\55\ Use of E15 in 2014 was limited by the very
small number of stations choosing to market it, which numbered less
than 100 by the end of 2014 out of a total of more than 150,000
stations nationwide. Similarly, the number of retail stations offering
E85 was about 3,000 by the end of 2014, representing only about 2% of
stations nationwide.\56\ There were about 14 million FFVs in the fleet
in 2014, representing about 6% of all light-duty cars and trucks.
However, with only about 2% of retail stations offering E85, only a
minority of those FFVs had an E85 refueling station nearby. The
relative pricing of E15 and E85 compared to E10 at the retail level
also likely played a role in sales of these higher level ethanol blends
falling far below the available consumption capacity; while some
retailers passed savings associated with high ethanol RIN value along
to consumers, increasing demand for higher level ethanol blends, this
was not typical across the nationwide market.\57\
---------------------------------------------------------------------------

    \54\ 26 bill gal estimate assumes that FFVs in the fleet in 2014
had a cumulative consumption capacity of about 13 billion gallons of
E85, that E85 would average 74% ethanol, and that model year 2001
and later conventional vehicles had a cumulative consumption
capacity of about 110 billion gallons of E15 which would contain 15%
ethanol.
    \55\ Low actual consumption compared to consumption capacity may
also be a function of vehicle warranties which do not explicitly
permit the use of E15.
    \56\ Source: DOE's Alternative Fuels Data Center.
    \57\ The largest nationwide average discount for E85 relative to
gasoline reported in the Department of Energy's quarterly Clean
Cities Alternative Fuel Price Report in 2014 was 13.8% (October
2014; the average gasoline price was $3.34 per gallon and the
average E85 price was $2.88 per gallon). The Energy Information
Administration estimates that E85 contains 74% ethanol on average,
requiring a discount of approximately 22% per gallon for E85
relative to gasoline for E85 to priced equal to gasoline on a dollar
per BTU basis. Price discounts for E85 relative to gasoline were
higher or lower for individual regions, states, and stations.
---------------------------------------------------------------------------

    Since 2013, the number of FFVs in the fleet and the number of
retail stations offering E15 and E85 have grown, and we believe that
this growth has been influenced in part by the RFS program. However,
this growth has been very modest. Similarly, growth in the ability of
the market to supply advanced biofuel other than cellulosic biofuel and
BBD has also been modest. Current indications are that growth in all of
these areas will continue, and the capability exists for growth to
accelerate. However, growth is very unlikely to reach a level that
would enable the statutory volume targets to be met in the near term.
As a result, we believe that there will continue to be constraints on
the total volume of renewable fuel that can be consumed in 2015 and
2016.

C. Proposed Volume Requirements

    The purpose of the RFS program is to ensure that renewable fuels
are increasingly used to replace or reduce the use of fossil-fuel based
transportation fuel. Ethanol is currently the most widely used
renewable fuel for this purpose, with biodiesel being the second most
common renewable fuel and other fuels making up a significantly smaller
portion of the pool. For non-ethanol renewable fuels, the primary
supply constraint at present is the projected shortfall in domestic
production or importation of qualifying volumes. For ethanol blends,
there are both legal and practical constraints on the amount of ethanol
that can be supplied to the vehicles that can use it, notwithstanding
the considerable volumes that can be produced and/or imported.
Gasoline-powered vehicles and engines have for many years been designed
and warranted to use gasoline with ethanol up to 10%, and only blends
up to 10% ethanol have historically been legal for use. There are,
however, two other avenues through which gasoline with higher
concentrations of ethanol can be used. In 2010 and 2011, EPA granted
partial waivers that together allow 2001 and later model year light-
duty motor vehicles to use gasoline containing up to 15% ethanol.\58\
While such fuels are legal, retail service stations have been slow to
offer them. In addition, manufacturers have been increasingly
warranting their new vehicles to operate on E15 and have for some time
also been designing and marketing FFVs capable of operating on
denatured ethanol concentrations as high as 85%. These vehicles
represent about 7% of the in-use fleet in 2015. However, like the use
of E15 in 2001 and later model year vehicles, use of E85 in FFVs has
been limited in part by the relatively small number of retail stations
offering it.
---------------------------------------------------------------------------

    \58\ 75 FR 68,094 (Nov. 4, 2010) (First E15 Partial Waiver
Decision); 76 FR 4662 (Jan. 26, 2011) (Second E15 Partial Waiver
Decision).
---------------------------------------------------------------------------

    While there are constraints on expansion of renewable fuel use,
markets have a demonstrated ability to overcome constraints with the
appropriate policy drivers in place, as discussed in Section II.B.2
above. We believe that the RFS program can drive renewable fuel use,
and that it is appropriate to consider the potential of the market to
respond to the standards we set when we assess the amount of renewable
fuel consumption that can be achieved. Thus, we are proposing volume
requirements for advanced biofuel and total renewable fuel that take
into account both the constraints on supply and the ability of the RFS
program to drive consumption.
1. 2014
    Since 2014 has passed, we are proposing to base the applicable
volume requirements for that year on the number of RINs supplied in
2014 that are expected to be available for use in complying with the
standards. These RINs would include those that were generated for
renewable fuel produced or imported in 2014 as recorded in the EPA-
Moderated Transaction System (EMTS), minus any RINs that have already
been retired for non-compliance reasons or would be expected to be
retired to cover exports of renewable fuels.\59\ RINs that have already
been retired for non-compliance purposes include those retired to
correct for invalidly generated RINs, volumes for renewable fuel that
was spilled after RIN generation, etc. These RINs are recorded in EMTS
on an ongoing basis. However, the total number of RINs that would be
expected to be retired to cover exports of renewable fuel in 2014 will
only be recorded in EMTS after the compliance demonstration deadline
for 2014 has passed. Since the compliance deadline for all 2014 RIN
exports has not yet passed, we are proposing to estimate likely RIN
retirements for renewable exports using renewable fuel export
information from EIA.\60\ If RINs retired for exports are recorded in
EMTS prior to issuance of the final rule, we will use EMTS data instead
of EIA data in determining supply for 2014 in the final rule.
---------------------------------------------------------------------------

    \59\ Although we estimate that there are approximately 1.8
billion carryover RINs available, we are proposing not to count
those RINs as part of the ``supply'' for 2014 or later years, for
the reasons described in Section II.F.
    \60\ http://www.eia.gov/dnav/pet/pet_move_expc_a_EPOORDB_EEX_mbbl_m.htm.
---------------------------------------------------------------------------

    Actual supply in 2014 is shown in Table II.C.1-1 below. Further
details are provided in a memorandum to the docket.\61\ Since EIA does
not distinguish exports by D code, we assumed based on past practice
that all ethanol exports represent D6 ethanol, and all biodiesel
exports represent D4 BBD. We expect

that any errors introduced by this assumption will be very small.
---------------------------------------------------------------------------

    \61\ ``Summary of data on 2014 RIN Generation and Consumption,''
memorandum from David Korotney to EPA docket EPA-HQ-OAR-2015-0111.

                                       Table II.C.1-1--2014 Actual Supply
                                                 [Million RINs]
----------------------------------------------------------------------------------------------------------------
                                                     Domestic
                     D code                         production        Imports         Exports     Net supply \a\
----------------------------------------------------------------------------------------------------------------
3 & 7...........................................              33               0               0              33
4...............................................           2,131             496             124           2,502
5...............................................              79              64               0             143
6...............................................          13,759             336             846          13,250
All advanced biofuel (D3+D4+D5+D7)..............           2,243             560             124           2,679
All Renewable fuel (D3+D4+D5+D6+D7).............          16,002             896             970          15,929
----------------------------------------------------------------------------------------------------------------
\a\ Totals may not add up due to rounding.

Based on these volumes, we are proposing the applicable volume
requirements for advanced biofuel and total renewable fuel for 2014, as
shown in Table II.C.1-2 below. Discussion of the proposed cellulosic
biofuel and BBD volume requirements for 2014 can be found in Sections
IV.C and III.C, respectively.

          Table II.C.1-2--Proposed Volume Requirements for 2014
                            [Billion gallons]
------------------------------------------------------------------------

------------------------------------------------------------------------
Advanced biofuel...............................................     2.68
Renewable fuel.................................................    15.93
------------------------------------------------------------------------

2. 2015
    Despite the fact that this proposal is being released well into
2015, we believe that the market can achieve growth this year in
comparison to the volumes that were supplied in 2014 (though the rate
of growth will not be as high as compared to a scenario under which the
market is given the full lead time envisioned by the statute). To this
end, we are proposing that the volume requirement for advanced biofuel
in 2015 be 2.90 billion gallons. The market has already demonstrated
that this level is achievable, having reached 2.92 billion gallons in
2013. Nevertheless, it would be a significant increase from actual
supply in 2014 of 2.68 billion gallons and would recognize the lower
volumes already supplied to date in 2015. The primary reason that 2014
advanced biofuel volumes were below 2013 volumes is that imports of
sugarcane ethanol were 435 million gallons in 2013 but only 64 million
gallons in 2014.\62\ If this reduction had not occurred in 2014, total
advanced biofuel volumes could have been above 3.00 billion gallons.
Therefore, we believe that 2.90 billion gallons of advanced biofuel is
within reach of the market in 2015, despite late issuance of this
proposal. While it would require the market to supply more advanced
biofuel in 2015 than was actually supplied in 2014, supplies that
increase annually is exactly what Congress expected the RFS program to
compel. Indeed, an examination of the volumes of advanced biofuel set
forth in the Clean Air Act shows that Congress intended that the rate
of growth accelerate every single year between 2009 and 2015, though
cellulosic biofuel represents the majority of this growth.
---------------------------------------------------------------------------

    \62\ Based on import data from EMTS.
---------------------------------------------------------------------------

    A 2015 volume requirement of 2.90 billion gallons for advanced
biofuel would be a substantial reduction from the statutory volume
target of 5.50 billion gallons. As discussed in Section II.A.4, we
believe that a reduction from the statutory volumes is necessary given
the limitations on production and import capabilities and constraints
imposed by the ability of vehicles and engines to use renewable fuels,
particularly ethanol. Growth in advanced biofuel supply from 2014 to
2015 would be about 220 million gallons, substantially less than the
growth in the statutory volume target of 1,750 million gallons.
However, growth of 220 million gallons from 2014 to 2015 would require
the market to respond to the standard we set by supplying more advanced
biofuel than would be expected absent the RFS program, and to do so in
substantially less than a full calendar year. Indeed without the RFS
program, actual supply in 2015 may be no different than it was in 2014.
Nevertheless, we believe that 2.90 billion gallons of advanced biofuel
is possible given the potential for higher volumes of domestic and
imported advanced biofuels, including biodiesel and sugarcane ethanol,
among others, and would achieve both the intent of Congress to drive
the market forward and also acknowledge the clear limitations on supply
that exist. We believe that 2.90 billion gallons represents the maximum
amount of advanced biofuel that can be supplied in 2015.
    Similarly, for total renewable fuel, we are proposing a reduction
in the 2015 statutory volume target of 20.50 billion gallons to 16.30
billion gallons. While the statutory volume target for total renewable
fuel cannot be achieved in 2015 as discussed in Section II.A.4, we
believe that some growth can be expected in 2015 as the annual volume
requirement we set in the RFS program drives expansion in production
and import capabilities and infrastructure, and incentivizes more
favorable pricing of renewable fuels in the marketplace. Much of the
increase from 2014 of about 370 million gallons would result from the
increase in the advanced biofuel standard of 2.90 billion gallons
discussed above, with the remainder resulting from growth in the use of
conventional renewable fuel such as corn ethanol. We believe that the
market has already demonstrated that this increment of growth is
possible. For instance, growth in total renewable fuel in 2014 was 390
million gallons, and in 2013 it was even higher, despite the fact that
in both years the gasoline pool was essentially saturated with
ethanol.\63\ Thus, growth of 370 million gallons is within reach of a
responsive market even though 2015 is partially over.
---------------------------------------------------------------------------

    \63\ According to EIA's Short-Term Energy Outlook (May 2015),
pool-wide ethanol content was about 9.75% in 2013 and 9.85% in 2014.
---------------------------------------------------------------------------

    We request comment on our proposal for 2.90 billion gallons of
advanced biofuel and 16.30 billion gallons of total renewable fuel for
2015. Specifically, we request comment on whether these proposed
volumes appropriately reflect constraints on supply resulting from the
E10 blendwall and limitations in production and import capabilities, as
well as the ability of the market to respond to the standards we set in
the time available. Since we recognize that these proposed volumes
represent our

proposed judgment as to the maximum amount of renewable fuel that can
be supplied in 2015, and commenters may have information that supports
a different assessment, we request comment on whether higher or lower
volume requirements for advanced biofuel and total renewable fuel for
2015 would be more appropriate. For example, some commenters may view
the market as unable to overcome barriers such as significant
availability of E85 to consumers in the 2015 timeframe or significantly
higher volumes of BBD than were supplied in 2014, and would therefore
suggest applicable volumes for 2015 closer to what we are proposing for
2014. Other commenters may be more optimistic about the ability of the
market to respond to this NPRM and the final rule in the time period
remaining in 2015, and may suggest that once we have exercised our
authority to waive volumes of advanced biofuel and total renewable fuel
under the cellulosic waiver authority, additional volume waivers under
the general waiver authority for total renewable fuel for 2015 are
unnecessary. Finally, while we believe that growth in advanced biofuel
should be a priority in light of the lifecycle greenhouse gas emissions
reductions goals of the statute, and have reflected this view in our
proposed volume requirements, we also request comment on whether a
different relative growth in advanced biofuel and conventional
renewable fuel would be appropriate.
3. 2016
    We intend to finalize the volume requirements for 2016 by November
30 of this year, in accordance with the schedule set forth in the
statute. As a result, obligated parties and other stakeholders in the
marketplace will have the full compliance year to respond to the
standards that we set for 2016, unlike for 2015 when they will only
have part of the year to respond to the standards. We believe,
therefore, that the supply of renewable fuels to vehicles can grow more
dramatically in 2016 than in 2015. Moreover, as for the 2015 proposal,
we believe that this growth should emphasize advanced biofuels, as
Congress envisioned that all renewable fuel growth after 2014 would
arise from growth in advanced biofuel as opposed to conventional fuels.
Advanced biofuels are required to have substantially greater GHG
benefits than conventional renewable fuel. As a program designed not
only to increase the nation's energy security position but also
contribute to efforts to reduce impacts of climate change, we believe
that a focus on growth in advanced biofuel is appropriate. However, we
also acknowledge that the volume of non-advanced biofuel production and
use that has been achieved to date falls short of the volumes that
Congress envisioned. Therefore we believe it is appropriate to provide
for the continued growth of conventional renewable fuels at this time
as well.
    We are proposing that the advanced biofuel volume requirement would
grow by 500 million gallons in 2016, as compared to 2015, while the
remainder (the non-advanced portion) of the total renewable fuel
requirement would grow by 600 million gallons in the same timeframe. As
a result, the 2016 advanced biofuel and total renewable fuel
requirements would be 3.40 billion gallons and 17.40 billion gallons,
respectively. The corresponding amount of conventional renewable fuel
that would be needed would be 14.0 billion gallons. These proposed
volumes for both advanced biofuel and total renewable fuel represent
substantial reductions from the volumes specified in the statute for
2016. While we do expect the market to respond to the standards we set
to drive changes in production and consumption infrastructure as well
as more favorable relative pricing, we do not have confidence that
those changes could occur fast enough to attain volumes larger than we
are proposing for 2016.
    While the reductions in the statutory volumes that we are proposing
are substantial, the volume requirements that we are proposing for 2016
would nevertheless be significantly larger than any previous volume
requirements. The market would need to respond by increasing domestic
production and/or imports of renewable fuel, by significantly expanding
the infrastructure for distributing and consuming that renewable fuel,
and by improving the relative pricing of renewable fuels and
conventional transportation fuels at the retail level to ensure that
they are attractive to consumers. As described more fully in the next
section, we believe that the market has the capability of doing this in
2016 and thus reaching the volumes that we are proposing.
    We request comment on our proposal for 3.40 billion gallons of
advanced biofuel and 17.40 billion gallons of total renewable fuel for
2016; in particular we request comment on whether these proposed 2016
volumes appropriately reflect constraints on supply resulting from the
E10 blendwall and limitations in production and import capabilities, as
well as the ability of the market to respond to the standards we set in
the time available. Our intent is to set volumes at the maximum level
that in our judgment can be supplied to consumers, and we request
comment on whether higher or lower volume requirements for advanced
biofuel and total renewable fuel for 2016 would be more appropriate. As
for 2015, we request comment on whether volumes closer to those we are
proposing for 2014 would be more appropriate for 2016, or alternatively
whether it would be appropriate to only waive volumes of advanced
biofuel and total renewable fuel under the cellulosic waiver authority
for 2016 without waiving volumes of advanced biofuel or total renewable
fuel under the general waiver authority. Finally, while we believe that
growth in advanced biofuel should be a priority and have reflected this
view in our proposed volume requirements, we also request comment on
whether a different relative growth in advanced biofuel and
conventional renewable fuel would be appropriate.

D. Market Response to Proposed Volume Requirements for 2016

    In recognition of the fact that the various constraints on supply
that exist today were not as significant in years past, the volumes of
advanced biofuel and total renewable fuel that we are proposing for
2016 would require increases from 2014 levels that, while substantial,
are less than the increases that actually occurred in 2013. Moreover,
as shown in Figures II.D-1, II.D-2, and II.D-3, the volume requirements
in 2015 and 2016 would follow an upward trend consistent with that from
2012-2014, extending the market activities that produced increases in
past years to the near future.

[GRAPHIC] [TIFF OMITTED] TP10JN15.003

---------------------------------------------------------------------------

    \64\ As described in Section II.C.2, 2014 advanded biofuel
bolumes were below 2013 volumes primarily because imports of
sugarcane ethanol were 435 million gallons in 2013 but only 64
million gallons in 2014. BBD volumes were slightly higher in 2014
than they were in 2013.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP10JN15.004

    We believe the required volumes being proposed for advanced biofuel
and total renewable fuel for 2015 and 2016 reflect the maximum volumes
that can reasonably be expected to be produced and consumed for those
years. While we acknowledge that there is considerable judgment
involved in identifying the appropriate volumes, we note that each
increment is increasingly difficult for the market to accommodate. For
instance, the use of ethanol in gasoline increased dramatically between
2000 and 2009, but by 2010 nearly all gasoline contained ethanol.
Additional volumes of ethanol use in 2010 and thereafter increased much
more slowly as the market approached the E10 blendwall.
[GRAPHIC] [TIFF OMITTED] TP10JN15.005

    This trend suggests that increases in renewable fuel use after 2014
will require more dramatic efforts than in the past. Implementation of
the RFS program to date has led to ethanol use that is essentially at
the E10 blendwall today. Any further growth in ethanol volumes must
entail the use of higher-ethanol blends such as E15 and E85. As the
volume requirements we are proposing for 2016 represent significant
increases from 2014, we believe it would be unreasonable to expect the
market to supply more than the proposed volumes.
    In order to demonstrate that the volume requirements that we are
proposing are achievable, we investigated a number of scenarios
involving different types and sources of renewable fuel. Each of these
scenarios differs in terms of the volumes of higher ethanol blends that
would be supplied and the relative volumes of such fuels as BBD,
imported sugarcane ethanol, corn-ethanol, renewable diesel, and other
non-ethanol renewable fuel. While we cannot predict precisely how the
market would respond to the standards we are proposing, the fact that
at least some of the scenarios fall within the reasonably expected
capabilities of the market demonstrates that the volume requirements we
are proposing are achievable.
    Section II.D.1 below describes the E10 blendwall, while Section
II.D.2 uses estimates of ethanol volumes associated with the E10
blendwall as the basis for a number of volume scenarios that include
possible volumes of E85 use and the associated need for other renewable
fuels to meet the proposed volume requirements. While we have focused
this discussion on our proposal for volumes for 2016, a similar pattern
would exist with respect to our proposal for 2015 volumes.
1. E10 Blendwall
    In 2007 when Congress enacted the Energy Independence and Security
Act with provisions for the current RFS program, the gasoline pool was
composed of about half E10 and half E0. Today it is almost entirely
E10. While the E0 pool has been shrinking, the pools of E10, E15, and
higher level ethanol blends up to E85 have been increasing. In the
context of determining the total volume of ethanol that can be supplied
to vehicles in 2016, all of these gasoline-ethanol blends could
potentially play a role.
    For 2016, the portion of the statutory applicable volume for total
renewable fuel that may be satisfied with non-advanced biofuel (e.g.,
conventional renewable fuel, which is primarily ethanol) is 15.0
billion, and this amount is 67% of the total renewable fuel volume
target of 22.25 billion gallons specified by the statute for 2016.\65\
However, the ability of the market to use ethanol in 2016 is
constrained by the E10 blendwall, the volume of ethanol that could be
used if all gasoline contained 10% ethanol and there were no higher
level ethanol blends. The amount of ethanol associated with the E10
blendwall is driven by the total demand for gasoline, and thus ethanol
consumption will tend to increase if gasoline consumption increases and
ethanol consumption will tend to decrease if gasoline consumption
decreases. However, gasoline consumption is in fact declining. Prior to
EISA's passage, EIA in its AEO 2007 projected that U.S. gasoline
consumption would rise to about 159 billion gallons in 2016.\66\
Instead, gasoline consumption has declined considerably, and EIA now
predicts that approximately 137 billion gallons of gasoline will be
consumed in 2016.\67\ If all of the gasoline currently projected to be
consumed contained 10% ethanol, a total of 13.7 billion gallons of
ethanol would be used. For the RFS program, the decline in gasoline
consumption has meant that the E10 blendwall has become constraining
sooner and at a lower overall volume of ethanol than was expected in
2007. The trend of declining gasoline consumption is projected to
continue for a number of reasons, including the increasingly stringent
GHG and fuel economy standards set by EPA and NHTSA for on-road
vehicles.
---------------------------------------------------------------------------

    \65\ Notably, by 2015 no more than 15 billion gallons of non-
advanced biofuel may be used for compliance with RFS standards. The
statute requires that advanced biofuel account for all the growth in
renewable fuels used to comply with RFS standards beyond 2015.
    \66\ EIA's Annual Energy Outlook 2007: http://www.eia.gov/forecasts/archive/aeo07/pdf/0383(2007).pdf.
    \67\ EIA's May 2015 Short-Term Energy Outlook (STEO).
---------------------------------------------------------------------------

    In the face of declining gasoline consumption, using greater
volumes of ethanol beyond the E10 blendwall is a function of several
factors, some legal, and some market-driven. The ability to go beyond
the E10 blendwall is a function of actions taken by various fuel market
participants, including obligated parties, renewable fuel producers,
distributors and marketers, gasoline and diesel retailers, and
consumers. In this regard, the market has significant potential
flexibility and opportunities, and we believe that it can respond to
the standards we set to drive the use of higher ethanol blends, the E10
blendwall notwithstanding.
    Another constraint on the volume of ethanol that can be consumed is
the demand for E0. While there will undoubtedly be some volumes of E0
in 2016, we expect such volumes to be lower than they were in the past
as the market strives to expand consumption of ethanol under the
influence of the RFS program. The primary context in which E0 might
continue to be used is in recreational marine engines or other small
nonroad engines. As described in a memorandum to the docket, we expect
that the use of E0 rather than E10 would only reduce the total volume
of ethanol that can be consumed by about 13 million gallons out of the
13.69 billion gallons we estimated above.\68\ We have recently been
made aware of E0 being marketed in some locations, such as Florida
where recreational marine is a significant market, and in parts of the
Midwest such as Iowa where concerns over ethanol's impact on other
small engines may be at play. Nevertheless, we anticipate such E0
marketing to remain fairly limited given the widening use of ethanol
overall. As a result, we do not anticipate the volume of E0 having a
significant impact on ethanol consumption in 2016, particularly in
light of the offsetting effect of E15 volumes as described below.
Therefore, we have omitted from the scenarios described below the small
expected impact of E0 use on total ethanol consumption.
---------------------------------------------------------------------------

    \68\ ``Estimating E0 Volume Sold in the U.S. at marinas'',
memorandum from Lester Wyborny to EPA docket EPA-HQ-OAR-2015-0111
---------------------------------------------------------------------------

    Efforts to increase the use of ethanol beyond the blendwall is
primarily a function of the volume of E85 that is consumed, since
volumes of E15 are likely to continue to be small in 2016. Over the
last several years, EPA has taken a series of regulatory steps to
enable E15 to be sold in the U.S. In 2010 and 2011, EPA issued partial
waivers to enable use of E15 in model year 2001 and newer motor
vehicles, and in June of 2011, EPA finalized regulations to prevent
misfueling of vehicles, engines, and equipment not covered by the
partial waiver decisions. However, growth in the number of retail
stations offering E15 has been slow--currently there are only about 100
stations offering it. Even if this number grows more quickly in 2015
and 2016 than it did previously, such increases would probably not
increase total ethanol consumption by more than 5-10 million gallons in
comparison to the use of ethanol in E10.\69\ In the context of the

offsetting effect of E0 volumes on ethanol use that is described above,
therefore, we have omitted this small impact on total ethanol
consumption from the scenarios described below. However, in discussing
the volume of E85 that might need to be consumed to meet the volume
requirements we are proposing today, we acknowledge that there may also
be some E15.
---------------------------------------------------------------------------

    \69\ ``Projection of potential E15 consumption and its impacts
on total ethanol consumption'', memorandum from David Korotney to
EPA Air Docket EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    We have assumed that E10 contains 10.0% denatured ethanol. This is
consistent with survey data collected by the Alliance of Automobile
Manufacturers--indicating that the average ethanol content of all
gasoline containing at least 5% ethanol is about 9.74%. This estimate
is based on the use of ASTM International (ASTM) test method D-5599,
which measures only the alcohol portion of the gasoline, not any
denaturant that would have been included with the ethanol before it was
blended into gasoline. Since the denaturant portion of ethanol is at
least 2%, ethanol that is blended into gasoline contains no more than
98% ethanol. When blended into gasoline, therefore, the E98 would
result in a gasoline-ethanol blend containing no more than 9.8% pure
ethanol, or 10.0% denatured ethanol. Since all RFS ethanol volumes and
RINs are also calculated on a denatured ethanol basis, it is thus
appropriate to assume 10.0 percent denatured ethanol. Similarly, all
references to ``ethanol'' in this NPRM mean denatured ethanol.
2. Volume Scenarios
    The transportation fuel market is dynamic and complex, and the RFS
program is only one of many factors that determine the relative types
and amounts of renewable fuel that will be used. Thus, while we set the
applicable volume requirements for advanced biofuel and total renewable
fuel, we cannot precisely predict how the market will choose to meet
those requirements. We can, however, delineate a range of
possibilities, and doing so provides a means for judging whether the
proposed volume requirements are attainable.
    For our proposed 2016 total renewable fuel volume requirement of
17.40 billion gallons, there would be about 0.84 billion ethanol-
equivalent gallons needed beyond that supplied by E10, the proposed BBD
volume requirement of 1.8 billion actual gallons (equivalent to 2.7
billion D4 RINs as described in Section III.D.4), and that portion of
the cellulosic biofuel volume which we would expect to be derived from
non-ethanol biofuel (see Section IV.E).

    Table II.D.2-1--Breakdown of Renewable Fuel Use in 2016 Based on
                            Proposed Volumes
                  [Billion ethanol-equivalent gallons]
------------------------------------------------------------------------

------------------------------------------------------------------------
Total renewable fuel..........................................     17.40
Ethanol consumed as E10 \a\...................................    -13.69
Non-ethanol cellulosic biofuel................................     -0.17
Biomass-based diesel \b\......................................     -2.70
Additional renewable fuel that must be used...................      0.84
------------------------------------------------------------------------
\a\ Includes all sources of ethanol (cellulosic, advanced, and
  conventional)
\b\ Represents 1.80 billion physical gallons.

The E10 blendwall and limitations in production capabilities for non-
ethanol biofuels are the primary factors that constrain renewable fuel
supply. Other factors include the relative pricing of renewable fuels
and conventional (fossil-based) fuels, engine warranty limitations on
the use of biodiesel for the current in-use fleet, and the need for
distribution system improvements. All of these factors could play a
role in determining how the market chooses to supply the additional
0.84 billion gallons needed as shown in Table II.D.2-1. The options
available to the market to fulfill the need for 0.84 billion gallons of
renewable fuel include the following:

     Increase the production and use of BBD above the proposed
standard of 1.80 billion gallons
     Increase import and use of sugarcane ethanol and/or
domestic production of corn-ethanol, which would result in a
corresponding increase in E85
     Increase production and/or imports of conventional (D6)
biodiesel and renewable diesel
 Increase the production of other non-ethanol advanced
biofuels, such as heating oil, jet fuel, naphtha, butanol, and
renewable fuels coprocessed with petroleum

In determining the amounts of each type of renewable fuel, the market
would also need to satisfy the proposed advanced biofuel standard of
3.40 billion gallons.
    To illustrate the possible outcomes, we evaluated a number of
scenarios with varying levels of E85, imported sugarcane ethanol,
advanced biodiesel and other non-ethanol advanced biofuels, and
imported conventional biodiesel (likely to be made from palm oil). In
doing so we sought to capture the range of possibilities for each
individual source. For imported conventional biodiesel we examined
volumes up to and slightly higher than the level that was actually
imported in 2014--225 million gallons.\70 \The range of other non-
ethanol advanced biofuels is based on the range of volumes achieved
over the last several years. Each of the rows in Table II.D.2-2
represent a scenario in which the proposed total renewable fuel and
advanced biofuel volume requirements would be satisfied.
---------------------------------------------------------------------------

    \70\ Actual imports of conventional non-ethanol renewable fuels
in 2014 were 53 million gallons of biodiesel and 151 million gallons
of renewable diesel. They have been represented here in biodiesel-
equivalents for simplicity.

      Table II.D.2-2--Volume Scenarios Illustrating Possible Compliance With 3.40 Bill Gal Advanced Biofuel and 17.40 Bill Gal Total Renewable Fuel
                                                                 [Million gallons] \a b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Biomass-based     Sugarcane ethanol   Other non-ethanol     Conventional
                         E85                           Total ethanol \c\    diesel (D4) \d\          (D5)            advanced (D5)      biodiesel (D6)
--------------------------------------------------------------------------------------------------------------------------------------------------------
100.................................................              13,760               1,997                 102                 100                 250
100.................................................              13,760               2,030                 102                  50                 250
100.................................................              13,760               2,063                 102                   0                 250
100.................................................              13,760               2,131                   0                   0                 182
200.................................................              13,826               1,952                 168                 100                 250
200.................................................              13,826               1,986                 168                  50                 250

200.................................................              13,826               2,019                 168                   0                 250
200.................................................              13,826               2,065                   0                 100                 138
400.................................................              13,959               1,898                 301                  50                 250
400.................................................              13,959               1,989                 113                 100                 125
400.................................................              13,959               2,056                 113                   0                 125
400.................................................              13,959               2,098                   0                  50                  50
600.................................................              14,091               1,800                 433                  64                 250
600.................................................              14,091               1,901                 245                 100                 125
600.................................................              14,091               2,026                  58                 100                   0
600.................................................              14,091               2,093                  58                   0                   0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Assumes that the cellulosic biofuel proposed standard for 2016 is 206 mill gal, of which 33 mill gal is assumed to be ethanol for the purposes of
  these scenarios and the remainder is primarily biogas.
\b\ Biomass-based diesel and conventional biodiesel are given as biodiesel-equivalent volumes. Others are given as ethanol-equivalent volumes. Biodiesel-
  equivalent volumes can be converted to ethanol-equivalent volumes by multiplying by 1.5.
\c\ For the range of total ethanol shown in this table, the nationwide poolwide average ethanol content would range from 10.05% to 10.28%. The majority
  of gasoline will contain 10% ethanol, and some gasoline will contain higher levels of ethanol such as E15 or E85.
\d\ Includes supply from both domestic producers as well as imports.

    The scenarios in the table above are clearly not the only ways that
the market could choose to meet the total renewable fuel and advanced
biofuel volume requirements that we are proposing today, but they are
illustrative of many ways that it could play out. While we are not in a
position to predict how the market would respond to the volume
requirements we are proposing today, we believe that the range of
possibilities for E85, BBD, and other sources is a clear indication
that the standards we are proposing are achievable.
    With regard to E85, according to EIA there will be about 16 million
FFVs in the in-use fleet in 2016 with a total consumption capacity of
about 14 billion gallons of E85.\71\ While only about 2% of retail
stations nationwide currently offer E85, the fraction of FFVs with
access to E85 is higher than 2% since the vast majority of vehicles are
within reasonable range of more than one retail station on typical
trips. If only 5% of all FFVs had a retail station nearby that offered
E85, they could consume 800 million gallons of E85 in 2016 under
favorable consumer pricing conditions. We recognize that the market
would need to compel E85 prices to be increasingly favorable relative
to E10 in order to provide the incentive for FFV owners to purchase
E85, but this is exactly how a fully functional market will react to
standards designed to drive growth in renewable fuel as Congress
intended. Thus we believe it is possible for the market to reach
volumes perhaps as high as 600 million gallons under favorable pricing
conditions (i.e., where consumers believe they are obtaining an
economic advantage through purchase of E85).

    \71\ According to AEO2015, Table 42, total vehicle miles
travelled by FFVs in 2016 will be about 7.95% of all light-duty
gasoline-powered vehicles, equivalent to about 10.9 bill gal of E10
or 13.9 bill gal of E85.
---------------------------------------------------------------------------

    We also believe that it is possible for the market to exceed 1.8
billion gallons of BBD in 2016. As of 2013, the total production
capacity for all registered and unregistered biodiesel facilities was
about 3.6 billion gallons,\72\ substantially more than the actual
domestic production in 2014 of 1.46 billion gallons.\73\ More than 2.7
billion gallons of this production capacity has already been registered
under the RFS program. Moreover, the U.S. imported several hundred
million gallons of biodiesel and renewable diesel in 2014. The combined
volumes of soybean oil, corn oil, and waste oils produced annually is
far more than would be needed to produce 2.1 billion gallons of
biodiesel. It is possible that the market could divert additional
feedstocks from food and other domestic uses or exports to the
production of biodiesel. For instance, in 2014 exports of soy oil were
250 million gallons and exports of rendered fats and greases was 440
million gallons.74 75
---------------------------------------------------------------------------

    \72\ A complete list of biodiesel plants and their capacities as
of 2-6-13 has been placed in the docket. We are not aware of
significant changes to the industry profile since this list was
compiled.
    \73\ 1.46 bill gal represents total domestic production of both
D4 biodiesel and renewable diesel.
    \74\ USDA Economic Research Service, Oil Crops Yearbook, Table
5, ``Soybean oil: Supply, disappearance, and price'', updated 3/30/
2015. Assumes 7.68 lb/gal.
    \75\ Render Magazine, April 2015. Table 2. Assumes 7.68 lb/gal.
---------------------------------------------------------------------------

    As Table II.D.2-2 illustrates, the proposed standards could result
in the consumption of as much as 2.3 billion gallons of D4 and D6
biodiesel and renewable diesel, representing an increase of about 600
million gallons over the historical high. While this would be a
substantial increase, we believe that it is possible. A portion of this
increase is likely to be renewable diesel which is indistinguishable
from conventional diesel fuel and thus would experience no impediments
related to cold temperatures or manufacturer warranties; in both 2013
and 2014, the market supplied about 300 million gallons of renewable
diesel. Even if there were no renewable diesel, 2.3 billion gallons of
biodiesel would represent less than 4% of the nationwide pool of diesel
fuel in 2016. Because essentially all engine manufacturer warranties
permit up to 5% biodiesel to be used in their engines, and most medium
and heavy-duty engine manufacturers warrant the use of blends up to B20
in their more recent models,\76\ the use of biodiesel in 4% of the
overall diesel pool should be possible from a consumption viewpoint.
For instance, most diesel fuel could contain 5% biodiesel while still
allowing some diesel fuel to contain no biodiesel to accommodate that
used in northern states during the coldest months of the year. Also,
B20 could be used in a number of centrally-fuelled fleets composed of
newer engines without violating manufacturer warranties, and additional
volumes of biodiesel could be used in heating oil. It is reasonable to
expect that the

infrastructure that already exists to distribute and blend such fuels
could be expanded to accommodate this additional volume in the time
available.
---------------------------------------------------------------------------

    \76\ ``OEM Support,'' fact sheet from National Biodiesel Board,
August 2014.
---------------------------------------------------------------------------

    While the scenarios in Table II.D.2-2 are intended to demonstrate
the flexibility that the market has to respond to the volumes we are
proposing, and indeed many additional scenarios could be generated, we
do not believe that all scenarios are equally likely. Certainly some
are more likely than others. However, we are not in a position to
identify those that are most likely and we are not in a position to
predict what will actually occur. In particular, those scenarios that
represent reliance on one source without taking advantage of supply
from other sources are, we believe, least likely to occur.
    The market can be expected to choose the lowest cost path to
compliance, but regulated parties may also respond to the standards we
set with investments in production, distribution, and consumption
infrastructure that is focused on longer term growth. Such investments
could result in the selection of higher cost options in the near term,
but would enable lower costs in the longer term. Other activities that
result in more favorable pricing between renewable fuels and fossil-
based fuels will also play a role in determining the actual mix of
types and amounts of biofuels used to meet the final standards, and
such activities cannot be predicted. Because of these complexities in
market dynamics, we do not believe it would be appropriate to identify
a specific scenario from Table II.D.2-2 as being most representative of
how the market will respond to the proposed volume requirements.
    Further, it would be inappropriate to construct new scenarios based
on the highest volumes in each category that are shown in Table II.D.2-
2 in order to argue for higher volume requirements than we have
proposed. Doing so would presume that the specific volumes for each
type of renewable fuel, and thus the underlying scenarios, are all
equally likely or equally achievable. We have more confidence in the
ability of the market to achieve 3.40 billion gallons of advanced
biofuel through some combination of different types of renewable fuel
than we have in the ability of the market to achieve a specific level
of, say, BBD. Thus, for instance, while the highest BBD volume shown in
Table II.D.2-2 is 2,131 million gallons, we are not able to say whether
this specific level of BBD is one that the market could be expected to
achieve in 2016, notwithstanding our belief that such volumes are
theoretically possible as described earlier. The same is true for the
highest level of E85 shown in Table II.D.2-2 of 600 million gallons, or
the highest level of sugarcane ethanol of 433 million gallons. In
addition, the consumption of each fuel in Table II.D.2-2 is not
independent of the consumption of the other fuels in the table. For
example, greater BBD production reduces the likelihood of large imports
of palm biodiesel because these two fuels compete against one another.
The probability that the upper limits of all sources shown in Table
II.D.2-2 could be achieved simultaneously is extremely unlikely.
    The range of options available to the market to attain compliance
with the proposed volume requirements provide us with confidence that
they are achievable. Nevertheless, we recognize that to the extent that
the proposed waivers rely on a finding of ``inadequate domestic
supply'', our objective is to set the volume requirements as precisely
as possible at the intersection between an ``inadequate supply'' and
supply that is adequate. Given the complexities of the fuels market,
this is a very challenging task, and one that necessarily involves
considerable judgment. Based on our assessment of both the current
capabilities of the industry and the power of the market to respond to
ambitious volume requirements, we believe that our proposed volumes are
the best possible estimate of the intersection between ``inadequate
supply'' and supply that is adequate.
    Because the standards that we are proposing would compel the market
to supply higher volumes than would occur in the absence of an RFS
program and indeed higher volumes than are currently being supplied,
RIN prices are likely to be higher than historical levels. RIN price
increases are an expected market response to an increased renewable
fuel mandate that is pushing volumes beyond levels that the market
would otherwise use. Furthermore, high RIN prices help to promote
growth in renewable fuel supply. For instance, higher RIN prices would
likely increase the incentive to import renewable fuels. Both ethanol
and biodiesel/renewable diesel worldwide could be diverted from their
current markets given a sufficiently high RIN price. High RIN prices
can also provide the potential for reductions in the retail selling
prices of E85 and E15 if distributors, blenders, and retailers pass the
value of those RINs to end users. Finally, sustained high RIN prices
create the incentives needed to spur investment in new technologies and
production capacity, a critical need if the market is going to continue
expanding in future years according to Congress' intentions.
    Given the variability in potential compliance scenarios that
exists, we believe that regulated parties have the ability to meet the
proposed standards for 2016. Stakeholders have the ability to overcome
market barriers to expanded use of renewable fuels, making the
standards we are proposing today attainable. Potential actions that
stakeholders can take include:

 Working with vehicle manufacturers to increase the number of
FFVs in the fleet
 Increasing the number of retail stations offering E15 and E85
through direct installation of new equipment or providing grants to
retail owners, and locating those stations offering E15/E85 closest to
higher populations of vehicles than can use those fuels
 Developing contractual mechanisms to ensure favorable pricing
of E15 and E85 at retail compared to E10 to boost sales volumes
 Increased production and/or imports of non-ethanol renewable
fuels (e.g., greater production of drop-in biofuels)
 Expanded co-production of non-ethanol renewable fuels with
petroleum at new and existing facilities

    Finally, the RFS program contains two other provisions that provide
additional flexibility to obligated parties in the event that they
choose not to invest in increasing the supply of renewable fuels. The
first is the option to carry a deficit into 2017. This option would
provide the industry additional time to increase supply. The second
available flexibility is carryover RINs, discussed in more detail in
Section II.F.

E. Treatment of Carryover RINs

    Neither the statute nor EPA regulations specify how or whether EPA
should consider the availability of carryover RINs in exercising its
waiver authorities either in the standard-setting context or in
response to petitions for a waiver during a compliance year. As
described in the 2007 rulemaking establishing the RFS regulatory
program,\77\ carryover RINs are intended to provide flexibility in the
face of a variety of circumstances that could limit the availability of
RINs, including weather-related damage to renewable fuel feedstocks and
other circumstances affecting the supply of renewable fuel that is
needed to meet the standards. In the 2010-2012 time period, obligated
parties collectively surpassed the RFS renewable fuel blending
requirements,

and were able to accumulate 2.6 billion carryover RINs.
---------------------------------------------------------------------------

    \77\ 72 FR 23900, May 1, 2007.
---------------------------------------------------------------------------

    The potential role of carryover RINs in minimizing waivers of the
statutory applicable volume targets was first addressed in the context
of the rule establishing RFS standards for 2013. In the context of that
rulemaking, we estimated that 14.5 billion gallons of ethanol would be
needed to meet the total statutory total renewable fuel volume target
of 16.55 billion gallons, assuming that no BBD was produced above the
1.28 billion gallons required by the BBD standard. We also determined
that the total amount of ethanol the market could absorb as E10 in 2013
was 13.1 billion gallons, leaving a potential gap of 1.4 billion
gallons. We then described how BBD production in excess of the BBD
standard, increased production of other non-ethanol renewable fuels,
and use of E85 could contribute to the needed gallons. We also pointed
out that about 2.6 billion carryover RINs would be available in 2013,
which was more than enough to cover the potential gap of 1.4 billion
gallons if other approaches to compliance were not realized. We
decided, therefore, that a waiver of the statutory applicable volume of
total renewable fuel was not needed in 2013.\78\ Our approach was
challenged in court, and upheld in Monroe Energy v. EPA.\79\
---------------------------------------------------------------------------

    \78\ 78 FR 49794, August 15, 2013.
    \79\ Monroe Energy v. EPA, 750 F.3d 909 (D.C. Cir. 2014).
---------------------------------------------------------------------------

    We are not now in a position to confidently assess the volume of
carryover RINs currently available, since obligated parties and
exporters have not yet submitted their compliance demonstrations for
2013. However, based on the number of RINs generated in 2013 and
available data on renewable fuel exports and RIN retirements in 2013,
we estimate that 800 million carryover RINs will need to be used for
compliance with the 2013 RFS standards. This will reduce the bank of
carryover RINs to approximately 1.8 billion RINs. For purposes of our
proposed volume requirements for 2014, 2015, and 2016, we considered
whether some specific number of carryover RINs below the current level
of 1.8 billion would be sufficient for the critical compliance
flexibility, market liquidity, and program buffer functions served by
carryover RINs, such that we could effectively require some use of
carryover RINs by setting applicable volume requirements at levels
higher than could be achieved through actual renewable fuel blending
and use in these years.
    We believe, however, that it would be prudent, and would advance
the long-term objectives of the Act, not to set standards for 2014,
2015, and 2016 so as to intentionally draw down the current bank of
carryover RINs. We believe that the availability of this full volume of
carryover RINs will be important for both obligated parties and the RFS
program itself in addressing significant future uncertainties and
challenges, particularly since compliance with the proposed advanced
and total renewable fuel standards is expected to require significant
progress in growing and sustaining production of advanced biofuels and
using ethanol in quantities that exceed the E10 blendwall.\80\
---------------------------------------------------------------------------

    \80\ As previously explained in this action, the ``E10
blendwall'' is the volume of ethanol that can be consumed
domestically as E10. We expect that compliance with the total
renewable fuel volume requirements will require more ethanol use
than is possible through widespread use of E10.
---------------------------------------------------------------------------

    Although the issue in this proposed rulemaking is whether to waive
statutory applicable volumes in the context of establishing new
standards, we note that the availability of carryover RINs is an
important factor in deciding whether to waive standards already in
effect. Each year, obligated parties make significant efforts to comply
with RFS requirements, and participants in the renewable fuels market
make significant efforts to supply the renewable fuels needed for
compliance. Changing those requirements during the compliance year to
address unforeseen supply disruptions or for other reasons would be
disruptive to businesses and therefore to the long-term objectives of
the RFS program to provide incentives to industry to increase the
production and use of renewable fuels. Preserving the current bank of
carryover RINs at this time will reduce the risk that waivers may be
needed after the 2014, 2015 and 2016 standards are in place to address
unforeseen circumstances.\81\
---------------------------------------------------------------------------

    \81\ The statute and EPA's regulations provide another means of
compliance flexibility--obligated parties may carry forward a
compliance deficit for one year. But the statute and regulations
also require that any deficit be paid back in the following year and
that the standards applicable in the following year be met. Given
that our proposed standards increase year to year, it may be
increasingly difficult for an obligated party to both repay a
deficit and meet higher standards in the same year. Thus, this
provision does not replace carryover RINs as an important compliance
tool to address increasingly challenging requirements and unforeseen
circumstances.
---------------------------------------------------------------------------

    In addition, the RIN system was developed in part to implement the
statutory requirement for obligated parties to earn ``credits'' for
overcompliance that could be used in another year or sold to others.
The RFS standards are a mandate with serious ramifications to obligated
parties that fail to comply. As intended by Congress, carryover RINs
help provide compliance flexibility. We appreciate that obligated
parties make individual decisions about whether and how many RINs to
acquire for their compliance management purposes, and that a decision
by EPA to effectively ``draw down'' their bank of carryover RINs in
calculating future volume requirements may decrease their compliance
flexibility, increase their risk of noncompliance, and affect their
incentives to build-up carryover RIN balances. We understand that
obligated parties in many instances acquire RINs for carryover to
provide just that kind of flexibility, and that assuming use of
carryover RINs in setting the RFS standards may in the future
discourage that kind of responsible behavior.
    Finally, we appreciate that with the increasing renewable fuel
volume targets established in the Act for the future, combined with the
projected decreasing use of gasoline and diesel fuel resulting from
more stringent vehicle emission and mileage requirements, the ability
of obligated parties to increase the bank of carryover RINs through
additional overcompliance in the future will be much more difficult.
Therefore, any draw-down in the bank of carryover RINs required through
setting volume requirements at levels higher than can be achieved
through actual renewable fuel use could not likely be reversed in the
future. Given the importance of carryover RINs noted above, this
consideration suggests that a deliberate draw-down of the RIN bank
would not be prudent.
    For all of the reasons noted above, EPA is not proposing to set
renewable fuel volume requirements at levels that would envision the
draw-down in the bank of carryover RINs. We welcome comments on this
analysis and thoughts on how EPA should consider carryover RINs in
establishing renewable fuel volume requirements for 2014, 2015, and
2016.

F. Impacts of Proposed Standards on Costs

    In the following sections we provide cost estimates for three
illustrative scenarios--one, if the entire change in the advanced
standards is met with soybean oil BBD; two, if the entire change in the
advanced standards is met with sugarcane ethanol from Brazil; and
three, if the entire change in the conventional standards (i.e., non-
advanced) is met with corn ethanol. While a variety of biofuels could
help fulfill the advanced standard beyond soybean oil BBD and sugarcane
ethanol

from Brazil, these two biofuels have been most widely used in the past.
We believe these scenarios provide illustrative costs of meeting the
proposed standards. For this analysis, we estimate the per gallon costs
of producing biodiesel, sugarcane ethanol and corn ethanol relative to
the petroleum fuel they replace at the wholesale level, then multiply
these per gallon costs by the applicable volumes established in this
rule for the advanced and total renewable fuel categories. More
background information on this section, including details of the data
sources used and assumptions made for each of the scenarios, can be
found in a memorandum submitted to the docket.\82\
---------------------------------------------------------------------------

    \82\ ``Illustrative Costs Impact of the Proposed Annual RFS2
Standards, 2014-2017,'' Memorandum from Michael Shelby to EPA Air
Docket EPA-HQ-OAR-2015-0111.
---------------------------------------------------------------------------

    A number of different scenarios could be considered the
``baseline'' for the assessment of the costs of this rule. For the
purposes of showing illustrative overall costs of this rulemaking, we
are proposing to use the preceding year's standard as the baseline
(e.g., the baseline for the 2016 advanced standard is the proposed
applicable 2015 advanced standard, etc.), an approach consistent with
past practices.
    The 2014 standards were not finalized in 2014 so it is difficult to
estimate what their costs may have been. Market participants may have
anticipated a final 2014 standard would require higher levels of
biofuels than the market would provide in the absence of the standard,
which would contribute to the positive RIN prices witnessed in 2014. In
contrast, the 2014 standards being proposed in this rulemaking
represent reductions in both the advanced and conventional volumes
compared to the 2013 standards, suggesting a reduction in costs for
this proposed 2014 rule compared to the 2013 standards. Finally, the
2014 standards being proposed in this rulemaking are based on actual
production levels in 2014, suggesting that the 2014 standards we are
proposing are what would have happened in the marketplace absent a
rulemaking. Given the complexity of this issue, we have not attempted
to estimate the costs of the 2014 standards. Therefore, we only provide
illustrative costs for the 2015 and 2016 advanced biofuel standards and
total renewable fuel standards.
    Because we are focusing on the wholesale level in each of the three
scenarios, these comparisons do not consider taxes, retail margins, and
any other costs or transfers that occur at or after the point of
blending (i.e., transfers are payments within society and not
additional costs). Further, we do not attempt to estimate potential
costs related to infrastructure expansion with increased biofuel
volumes. In addition, because more ethanol gallons must be consumed to
go the same distance as gasoline and more biomass-based diesel must be
consumed to go the same distance as petroleum diesel due to each of the
biofuels' lesser energy content, we consider the costs of ethanol and
biomass-based diesel on an energy equivalent basis to their petroleum
replacements (i.e., per energy equivalent gallon (EEG)).
    For our first scenario, we consider the costs of soybean-based
biodiesel to meet the entire change in the advanced standards. The
proposed 2014 standard is being set at the actual level of advanced
biofuels produced in 2014, 2.68 billion gallons. The total advanced
biofuel volumes are being proposed for 2015 at 2.90 billion gallons and
3.40 billion gallons in 2016. Comparing the difference in costs between
biomass-based diesel and petroleum-based diesel, we estimate a cost
difference that ranges from $1.48 to $1.56/EEG in 2015 and from $1.45
to $2.09/EEG in 2016. Multiplying the per gallon cost estimates by the
volume of fuel displaced by the advanced standard, on an energy
equivalent basis, results in an overall annual cost of $218 to $229
million in 2015 and $483 to $697 million in 2016.
    For our second scenario, we provide illustrative estimates of what
the potential costs might be if all additional volumes used to meet the
2015 and 2016 advanced biofuel standards above the previous year's
advanced biofuel standard are met with imported Brazilian sugarcane
ethanol. Comparing the difference in costs between sugarcane ethanol
and the wholesale gasoline price on a per gallon basis, we estimate
cost differences that range from $1.04 to $2.80/EEG in 2015 and from
$0.85 to $2.61/EEG in 2016. Taking the difference in per gallon costs
for sugarcane ethanol and the wholesale gasoline price and multiplying
that by the volume of petroleum displaced on an energy equivalent basis
from the advanced standard results in an overall estimated annual cost
of $228 to $615 million for 2015 and $424 to $1,303 million for 2016.
    For the third scenario, we assess the difference in cost associated
with a change in the implied volumes available for conventional (i.e.,
non-advanced) biofuels for 2015 and 2016. We provide illustrative
estimates of what the potential costs might be if corn ethanol is used
to meet the entire conventional renewable fuel volumes. The implied
2014 volume allowance for conventional renewable fuel is 13.25 billion
gallons, 13.40 billion gallons in 2015, and 14.00 billion gallons in
2016. If corn ethanol is used to meet the difference between the
implied 2014 to 2015 and 2015 to 2016 conventional renewable fuel
volume increases, an increase of 150 million gallons of corn ethanol
would be required in 2015 and 600 million gallons in 2016. Comparing
the difference in costs between corn ethanol and the wholesale gasoline
price, we estimate cost differences that range from $0.81 to $0.92/EEG
in 2015 and from $0.58 to $0.90/EEG in 2016. Taking the difference in
per gallon costs between the corn ethanol and the wholesale gasoline
price estimates and multiplying that by the volume of petroleum
displaced on an energy equivalent basis by the conventional standard
results in an overall estimated annual cost of $122 to $138 million for
2015 and $348 to $541 million for 2016.
    An alternative way of looking at the illustrative costs in 2016,
given the fact that this is a three year rule and the 2015 standards
may change, is to consider a volume change relative to the 2014
proposed standard. The cost estimate for meeting the 2016 standard
would range from $695 to $1,003 million if the entire advanced standard
were to be met with soybean-based diesel. The cost estimates would
range from $610 to $1,877 million if the entire advanced standard were
met with sugarcane ethanol. The cost estimate for meeting the entire
conventional standard in 2016 with corn ethanol would range from $435
to $676 million.
    The short time frame provided for the annual renewable fuel rule
process does not allow sufficient time for EPA to conduct a
comprehensive analysis of the benefits of the 2015 and 2016 standards
and the statute does not require it. Moreover, as discussed in the
proposed rule establishing the 1.28 billion gallon requirement for BBD
in 2013, the costs and benefits of the RFS program as a whole are best
assessed when the program is fully mature in 2022.\83\ We continue to
believe that this is the case, as the annual standard-setting process
encourages consideration of the program on a piecemeal (i.e., year to
year) basis, which may not reflect the long-term economic effects of
the program. Therefore, for the purpose of this annual rulemaking, we
have not quantified benefits for the 2015 and 2016 proposed standards.
We do not have a quantified estimate of the GHG impacts for the

single year (e.g., 2015, 2016). When the RFS program is fully phased
in, the program will result in considerable volumes of renewable fuels
that will reduce GHG emissions in comparison to the fossil fuels which
they replace. EPA estimated greenhouse gas, energy security and air
quality impacts and benefits for the 2010 Proposed RFS Rule for 2022.
---------------------------------------------------------------------------

    \83\ 77 FR 59477, September 27, 2012.
---------------------------------------------------------------------------

III. Proposed Biomass-Based Diesel Volumes for 2014-2017

    In this section we discuss the proposed biomass-based diesel (BBD)
applicable volumes for 2014 through 2017. It is important to note that
the BBD volume requirement is nested within both the advanced biofuel
and the total renewable fuel volume requirements; so that any
``excess'' BBD produced beyond the mandated BBD volume can be used to
satisfy both these other applicable volume requirements. Therefore, in
assessing what is the appropriate applicable BBD volume for 2014-2017,
it is important to consider not only the volume for BBD, which
effectively guarantees a minimum amount that will be produced, but also
the advanced biofuel and total renewable fuel volume requirements,
which historically have played a significant role in determining demand
for BBD as well.
    In proposing an applicable volume for 2017 we are addressing the
volume requirement but not the percent standards, in order to satisfy a
statutory requirement that when EPA sets the applicable volumes in the
absence of a statutory volume target, that we do so no later than 14
months before the first year for which such applicable volume will
apply.\84\ Since the statute does not specify a BBD volume target for
2017, we plan to finalize the applicable volume by this November. Since
the statute includes applicable volume targets for advanced biofuel,
total renewable fuel and cellulosic biofuel for 2017, we are not
required to establish 2017 applicable volumes for them at this time. We
believe it is prudent to delay establishing such volume targets until
the statutory deadline of November 30, 2016, to enable EPA to use the
most up-to-date information prior to the start of the calendar year.
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    \84\ CAA 211(o)(2)(B)(ii).
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A. Statutory Requirements

    The statute establishes applicable volume targets for years through
2022 for cellulosic biofuel, advanced biofuel, and total renewable
fuel. For BBD, applicable volume targets are specified in the statute
only through 2012. For years after those for which applicable volumes
are specified in the statute, EPA is required under CAA section
211(o)(2)(B)(ii) to determine the applicable volume, in coordination
with the Secretary of Energy and the Secretary of Agriculture, based on
a review of the implementation of the program during calendar years for
which the statute specifies the applicable volumes and an analysis of
the following factors:
    1. The impact of the production and use of renewable fuels on the
environment, including on air quality, climate change, conversion of
wetlands, ecosystems, wildlife habitat, water quality, and water
supply;
    2. The impact of renewable fuels on the energy security of the
United States;
    3. The expected annual rate of future commercial production of
renewable fuels, including advanced biofuels in each category
(cellulosic biofuel and BBD);
    4. The impact of renewable fuels on the infrastructure of the
United States, including deliverability of materials, goods, and
products other than renewable fuel, and the sufficiency of
infrastructure to deliver and use renewable fuel;
    5. The impact of the use of renewable fuels on the cost to
consumers of transportation fuel and on the cost to transport goods;
and
    6. The impact of the use of renewable fuels on other factors,
including job creation, the price and supply of agricultural
commodities, rural economic development, and food prices.

The statute also specifies that the applicable volume for BBD cannot be
less than the applicable volume for calendar year 2012, which is 1.0
billion gallons. The statute does not, however, establish any other
numeric criteria, or provide any guidance on how the EPA should weigh
the importance of the often competing factors, and the overarching
goals of the statute when the EPA sets the applicable volumes in years
after those for which the statute specifies applicable volumes. In the
period 2013-2022, the statute specifies increasing applicable volumes
of cellulosic biofuel, advanced biofuel, and total renewable fuel, but
provides no guidance on the extent to which BBD volumes should grow.

B. BBD Production and Compliance in Previous Years

    Due to the delayed issuance of the major regulatory revisions
necessary to implement changes enacted through the Energy Independence
and Security Act of 2007, EPA established a 2010 BBD standard that
reflected volume requirements for both 2009 and 2010, and allowed RINs
generated as early as 2008 to be used for compliance with that
standard. Given the complexity associated with the 2010 BBD standard,
we begin our review of implementation of the program with the 2011
compliance year. Reviewing the implementation of the BBD standards in
previous years is required by the CAA, and also provides insight into
the capabilities of the BBD industry to produce and import fuel. It
also helps us to understand what factors, beyond the BBD standard, may
incentivize the production and import of BBD. The number of BBD RINs
generated, along with the number of RINs retired for reasons other than
compliance with the annual BBD standards, are shown in Table III.B-1
below.
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    \85\ Net BBD RINs Generated and BBD RINs Retired for Non-
Compliance Reasons information from EMTS. Biodiesel Export
information from EIA (http://www.eia.gov/dnav/pet/pet_move_expc_a_EPOORDB_EEX_mbbl_a.htm).
    \86\ Each gallon of biodiesel generates 1.5 RINs due to its
higher energy content per gallon than ethanol. Renewable diesel
generates between 1.5 and 1.7 RINs per gallon.

                                         Table III.B-1--Biomass-Based RIN Generation and Standards in 2011-2013
                                                                 [Million gallons] \85\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                BBD RINs
                                                  BBD RINs        Exported BBD      retired, non-     Available BBD     BBD standard      BBD standard
                                                  generated          (RINs)          compliance           RINs            (Gallons)        (RINs) \86\
                                                                                reasons
--------------------------------------------------------------------------------------------------------------------------------------------------------
2011........................................             1,692               110                97             1,484               800             1,200
2012........................................             1,737               193                80             1,465             1,000             1,500
2013........................................             2,739               295                94             2,350             1,280             1,920
--------------------------------------------------------------------------------------------------------------------------------------------------------

In reviewing historical BBD RIN generation and use we see that the
number of RINs available for compliance purposes exceeded the BBD
standard by a significant margin in 2011 and 2013. Additional demand
for biodiesel may have been driven by a number of factors, including
demand to satisfy the advanced biofuel and total renewable fuels
standards, the biodiesel tax credit, and favorable blending economics.
In 2012 the available BBD RINs were slightly less than the BBD
standard. There are many reasons this may have been the case, including
the lapse of the biodiesel tax credit at the end of 2011.\87\
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    \87\ The biodiesel tax credit was reauthorized in January 2013.
It applied retroactively for 2012 and for the remainder of 2013. It
was once again extended in December 2014 through the end of 2014.
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    While total BBD volume produced and imported in 2013 was 1.79
billion gallons (2.74 billion BBD RINs), it is also instructive to
review the data on volumes that were produced domestically, imported,
exported, and retired for reasons other than compliance. Total domestic
production of BBD was 1.45 billion gallons (2.19 billion RINs), while
imports resulted in an additional 0.34 billion gallons (0.55 billion
RINs).\88\ This volume was not entirely available for compliance
purposes, however, since some of the BBD produced domestically was
exported and some RINs had to be retired for purposes other than
compliance. Based on EIA export data, we estimate that 0.196 billion
gallons (0.295 billion RINs) of BBD was exported in 2013.\89\ A
corresponding number of BBD RINs will eventually be retired by
exporters, as required by the RFS regulations, and therefore are not
available for use by refiners and importers in satisfying their 2013
obligations.\90\ Additionally, 0.094 billion BBD RINs were retired for
reasons other than compliance, such as volume error corrections,
contaminated or spoiled fuel, or fuel used for purposes other than
transportation fuel, heating oil, or jet fuel. Based on this
information, the actual amount of BBD available for compliance in 2013
totaled 2.36 billion RINs, representing approximately 1.55 billion
gallons of BBD. This is 430 million more BBD RINs than were required
for compliance with the BBD standard in 2013.
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    \88\ ``Summary of data on 2013 RIN generation and consumption'',
memorandum from David Korotney to EPA Air Docket EPA-HQ-OAR-2015-
0111.
    According to the U.S. Energy Information Administration (EIA),
Annual import data for BBD (Biodiesel and Renewable diesel countries
contributing to BBD imports (million gallons) were Argentina = 132,
Aruba = 6, Australia = 1, Belgium = 5, Canada = 45, Finland = 36,
Germany = 61, Indonesia = 52, Netherlands = 8, Norway = 9, South
Korea = 20, Panama = 3, Singapore = 164, Spain = 4, Taiwan = 1. (See
http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_EPOORDB_im0_mbbl_a.htm and http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_EPOORDO_im0_mbbl_a.htm
(last accessed April 6, 2015).
    Note that not all of the imported volumes generated BBD (D4)
RINs. Some of this volume may have generated Renewable Fuel (D6)
RINs or no RINs at all.
    \89\ U.S. Energy Information Administration (EIA). Annual export
data for Biodiesel (2013). See http://www.eia.gov/dnav/pet/pet_move_expc_a_EPOORDB_EEX_mbbl_a.htm (last accessed April 6,
2015).
    \90\ EMTS includes data on RINs retired for export, but the
values are incomplete as of this writing since the 2013 compliance
deadline has not yet passed.
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C. Applicable Volume of Biomass-Based Diesel for 2014

    For 2014 we are proposing to base the applicable volume
requirements on the number of RINs supplied in 2014. We propose to
define supply for 2014 as the number of BBD RINs that were available
for compliance in 2014. Supply would thus include RINs that were
generated for renewable fuel produced or imported in 2014 as recorded
in the EMTS, minus any RINs that have already been retired or would be
expected to be retired to cover exports of renewable fuels or for any
purpose other than compliance. RINs that have already been retired for
such circumstances as RINs being invalid, spills, corrected and
replaced RINs, etc. are recorded in EMTS on an ongoing basis. However,
complete information on RINs that are retired to cover exports of
renewable fuel is not available through EMTS until after the compliance
demonstration deadline for a given calendar year has passed. Since
compliance cannot occur until the standards are set, we propose to use
biodiesel export information from EIA in 2014 to estimate the number of
2014 BBD RINs that will be retired to satisfy obligations associated
with exported BBD.
    Actual supply of BBD in 2014 is shown in Table III.C-1 below.
Further details are provided in a memorandum to the docket.\91\ Since
EIA does not distinguish exports by D code, we assumed that all
biodiesel exports represent D4 BBD. We expect that any errors
introduced by this assumption will be very small.
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    \91\ ``Summary of data on 2014 RIN Generation and Consumption,''
memorandum from David Korotney to EPA docket EPA-HQ-OAR-2015-0111.

                            Table III.C-1--2014 Actual Supply of Biomass-Based Diesel
----------------------------------------------------------------------------------------------------------------
                                                                                BBD RINs
                                                     Domestic                      retired, non-
                                                  production and      Exports       compliance      Net supply
                                                      imports                         reasons
----------------------------------------------------------------------------------------------------------------
Million RINs....................................           2,709             124              82           2,502
Million gallons.................................           1,763              83              48           1,631
----------------------------------------------------------------------------------------------------------------

While the actual physical volume of D4 BBD supplied in 2014 was 1.63
billion gallons, we have used a physical volume of 1.67 billion gallons
as the 2014 volume requirement because the formula for calculating the
BBD percentage standard in 40 CFR 80.1405(c) includes a factor of 1.5,
presuming that all BBD is biodiesel. In reality, a significant portion
of BBD in 2014 was renewable diesel (328 million gallons), which
generally has an equivalence value of 1.7 rather than 1.5. The use of a
physical volume of 1.67 billion gallons ensures that the applicable
percentage standard for BBD accounts for the higher equivalence value
of the volume of renewable diesel produced and imported in 2014 and
results in a requirement for 2.50 billion RINs, consistent with supply.

D. Determination of Applicable Volume of Biomass-Based Diesel for 2015-
2017

    The statute requires that, in determining the applicable volume of
BBD, we review the implementation of the program in previous years.
Based on the fact that the industry made more BBD available in 2011 and
2013 than volume requirements for those years, we conclude that the BBD
standard is not the sole driver for the amount of BBD produced or
imported into the United

States.\92\ We believe that the advanced biofuel and total renewable
fuel standards are significant factors in the amount of biodiesel
produced and imported into the United States. We also believe that the
advanced and/or total renewable fuel standards can continue to drive
BBD supply in 2015-2017. As described in more detail in Section II.C,
we are proposing volumes of advanced biofuel and total renewable fuel
for 2015-2016 that require substantial growth beyond the volumes
supplied in 2014. We expect that the advanced biofuel and total
renewable fuel standards will continue to provide incentives for BBD
supply that exceeds the BBD standard.
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    \92\ The blenders tax credit for biodiesel likely also
incentivized additional biodiesel blending in these years.
---------------------------------------------------------------------------

    However, we recognize that in addition to being a component of
advanced biofuel and total renewable fuel, Congress also intended that
BBD have its own specific standard. Given that the statute requires
annual increases in advanced biofuel through 2022, it may be
appropriate for BBD to play an increasing role in supplying advanced
biofuels to the market, especially in light of the fact that BBD does
not contribute to the E10 blendwall. This proposal seeks to balance the
goals of supporting the BBD industry and incentivizing the production
of non-BBD advanced biofuels by providing a guaranteed, increasing
market for BBD and allowing all advanced biofuels to compete for market
share within the advanced biofuel category. In doing so we have
considered the ability of the advanced biofuel and total renewable fuel
standards to incentivize an increasing supply of BBD, the
implementation of the RFS program to date, and the statutory factors
listed in CAA 211(o)(2)(B) (discussed in further detail in Section
III.E below).
1. Implication of Nested Standards
    The BBD standard is nested within the advanced biofuel and total
renewable fuel standards. This means that when an obligated party
retires a BBD RIN (D4) to satisfy their obligation, this RIN also
counts towards meeting their advanced biofuel and total renewable fuel