SREs back in the Fray as Appeals Court Faults EPA Denials
11/27 1:27 PM
SREs back in the Fray as Appeals Court Faults EPA Denials CRANBURY, N.J. (DTN) -- Small Refinery Exemptions under the Clean Air Act's Renewable Fuel Standard are back in the news following an appeals court decision on Nov. 22 striking down the U.S. Environmental Protection Agency's decisions in April and June 2022 rejecting 100 requests from oil refineries seeking the exemption. Six small refineries challenged the EPA's denials, with the U.S. Court of Appeals for the Fifth Circuit ruling in their favor. The refineries included Calumet Shreveport Refining, L.L.C., Placid Refining Company, L.L.C., Ergon Refining, Inc., Wynnewood Refining Company, L.L.C., The San Antonio Refinery, L.L.C., and Ergon-West Virginia, Inc. "The EPA denied petitioners' years-old petitions using a novel CAA interpretation and economic theory that the agency published in December 2021. We conclude that the denial was (1) impermissibly retroactive; (2) contrary to law; and (3) counter to record evidence. We grant the petitions for review, vacate the challenged adjudications, deny a change of venue, and remand." In its ruling, the court notes three exemptions Congress granted small refineries, which are defined as having a crude throughput of no more than 75,000 bpd, because adhering to the RFS "might impose disproportionate economic hardship" on them. Congress did not define disproportionate economic hardship, while EPA in issuing the SRE denials said the economic harm can only be caused by the cost of compliance credits known as Renewable Identification Numbers, which can be secured by blending an approved renewable fuel with petroleum-based fuel or purchasing the RIN in the market. The first was a blanket exemption for all small refineries from complying with the RFS until 2011. The second exemption is initiated by the U.S. Energy Secretary. If after a statutorily mandated study conducted by the Department of Energy the Energy Secretary finds that meeting RFS obligations subject the small refinery to a "disproportionate economic hardship," then EPA as administrator of the RFS shall exempt the refinery from RFS obligations for "a period of not less than 2 additional years." The third exemption allows a small refinery to petition for an exemption "for the reason of disproportionate economic hardship." The court ruling said in evaluating the exemption the EPA, in consultation with the Secretary of Energy, "shall consider findings of the study...and other economic factors." The court also notes EPA "shall act on any petition...not later than 90 days after the date of receipt." In its ruling, the court said the case filed by the six small refineries "involves the last of the three small refinery exceptions enumerated in the CAA." On April 7, 2022, EPA rejected 36 petitions for SREs for the 2018 compliance year "using its revised interpretation of the subparagraph (B) exemption provision and RIN-passthrough economic theory." The court notes 31 of the 36 petitions were granted by EPA in 2019. "These August 2019 grants were subsequently ensnared in proceedings litigated in the D.C. Circuit unrelated to the dispute at hand. What is relevant, however, is that EPA moved for voluntary remand without vacatur to consider those petitions with regard to the Tenth Circuit's "alternate holdings" in Renewable Fuels Ass'n v. EPA ("RFA")," said the court. On Dec. 8, 2021, the D.C. court granted EPA's motion which included a proposal to change the approach to SRE eligibility to require that a petitioning small refinery to have received the initial exemption through 2010 in order to qualify for an SRE. "EPA once again applied its new interpretation and approach in June 2022 when it denied sixty-nine exemption petitions for the 2016 through 2021 RFS compliance years," said the Fifth Circuit Court. "EPA's new interpretation and approach -- which it applied in the Denial Actions -- displaced the adjudicative methodology the agency had relied on for over a decade." Under the new interpretation, "a small refinery's disproportionate economic hardship must be caused solely by RFS compliance costs. Second is a new economic theory. Called "RIN passthrough," EPA now theorizes that (A) the "cost of RINs is the same for all obligated parties, whether the RINs are acquired by blending renewable fuel or by buying them on the market" and (B) the "costs of RFS compliance (i.e., RINs) are passed through in the prices of refined products." In their complaint, the petitioners disagreed with EPA's RIN theory in that the price of a RIN "at any given point in time is identical for all refineries nationwide." And that "market prices for fuel and RIN costs correspond, which means all refineries could offset 100% of their RIN costs by raising the price of their fuel products, thereby passing RIN costs along to their customers." The court said, "that all refineries can completely pass on their RIN costs -- is so implausible as applied to the petitioners that it cannot be ascribed to a difference in view or agency expertise." The ruling pointed to Calumet's exemption petition, which included "micro-market" pricing data for its local market compared to Pasadena, Texas, which is considered an economically efficient market. The RIN passthrough theory applied to the Pasadena market, but not Calumet's micro-market, where prices were lower, "which means that fuel is discounted by more than the corresponding RIN market price." "EPA's macro-level analysis about fuel markets only supports a conclusion that passthrough can occur in fuel markets generally -- it does not rule out the existence of inefficient fuel markets. And those are the markets in which petitioners operate." The court also highlighted the disadvantage of a small refinery in purchasing RINs. "Ratable purchasing is an underlying premise of EPA's second finding -- a refinery must be able to purchase RINs at the same time they sell fuel in order for the market price to correspond with the price of RINs. That's not an option available to petitioners," said the court. In using the San Antonio Refinery as an example, the court said "Given the amount of fuel it produces, it would need to buy 75,000 RINs per day. But a trade size of 75,000 RINs is "essentially unheard of" in the RIN market -- most RINs are sold in "a clip of '1 million' at a time." Indeed, as TSAR explained to the EPA, it can't even find a RIN broker willing to transact at such low RIN quantities." Brian L. Milne, 1.732.768.0260,, (c) Copyright 2023 DTN, LLC. All rights reserved.
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