A hidden regulatory tax on large refiners and fuel consumers disappears
On June 3, the Environmental Protection Agency virtually eliminated, at least administratively, one of the indirect taxes that often arises under regulatory regimes: small refiner exemptions, or SREs, under the Clean Air Act Renewable Fuel Standard.
Such disproportionate economic hardship exemptions, or DEHs, free claimant small refiners from the obligation to (a) blend increasing amounts of renewable fuels into their gasoline or diesel production or (b) acquire a credit covering per gallon called Renewable Identification Numbers, or RINs, of biofuel producers like corn and cellulose ethanol plants or anaerobic digestion facilities on dairy or hog farms. They act as a tax on large refiners needed to offset exempt fuel volumes by blending more renewables or buying more RINs.
Since renewables are generally much cheaper than conventional gasoline or diesel, SREs also tax fuel consumers, who pay much more at the pump than they would for blended car or diesel fuel. truck, a problematic outcome given the skyrocketing prices at the pump.
More generally, SREs pit the oil industry and oil states that seek less blending and more exemptions against biofuel producers and corn ethanol-based Midwestern states that seek more blending and fewer exemptions. . Nevertheless, during the first decade of the Renewable Fuels Standard, SREs were relatively uncontroversial. This is partly because Congress exempted all, and then most, small refiners from compliance with the renewable fuels standard until the 2012 obligation year, which gave them the possibility of deciding to mix renewable fuels or to leave the transport sector by switching to the production of, for example, heating oil or aviation. fuel. It’s also because, until 2015, the EPA only granted a handful of SREs per year.
Then the EPA under President Donald Trump nearly quintupled the SREs, endorsing broad interpretations that: DEH can include general economic conditions; claimant small refiners are presumed to be entitled to 100% rather than previous partial exemptions; and small refiners can receive stand-alone waivers even if they have never received a prior waiver.
The EPA issued nearly 90 SREs from 2016 to 2018. Exempt gasoline and diesel fuel volumes increased from 2 billion gallons in 2013 to 30 billion gallons in 2017-2018, with avoided RIN purchases rising from 190 million to 3.2 billion RINs, creating an industry flashpoint, which arguably places SREs among the most contentious elements of the Clean Air Act since 2016.
In 2020, the United States Court of Appeals for the 10th Circuit unanimously struck down the Trump-era interpretations, ruling among other things, that a refinery must have continuously maintained its exempt status in order to qualify for a new SRE extension and that only harm resulting from compliance with the Renewable Fuels Standard – not general economic conditions or business decisions of a company – is referred to as DEH. In June 2021, the U.S. Supreme Court ruled that the EPA could grant non-continuous SREs, but left other 10th Circuit rulings untouched.
In its June 2022 denials, the EPA under President Joe Biden expanded on a December 2021 proposal and its April 2022 denials of more than 30 SRE petitions returned by the DC Circuit at the agency’s request. He wiped the slate clean by dismissing the remaining 69 petitions. In 70 densely reasoned pages, the agency ruled that:
- Although a small refiner does not need to have continuously maintained its exemption status, to qualify for an “extension of exemption” in the language of the Renewable Fuels Standard, it must at least have received – and not just been eligible for – the initial blanket exemption from the standard; otherwise, there would be no exemption to extend.
- The DEH must be caused solely by the costs of a small refiner to comply with the Renewable Fuels Standard, whether it is blending biofuel or acquiring RINs. Damage attributable to pandemics, inflation, recession – or a refinery’s discretionary dividend payments – is not identifiable for the purposes of the ERS.
- Harm can rarely be demonstrated by smaller refiners as they generally pass on to customers all of their costs of acquiring RINs. The EPA has updated, based on economic analysis, its previous market studies to confirm these cost implications.
- Additionally, the harm must be disproportionate to the costs of other refineries to comply with the renewable fuels standard. But compliance is inherently proportionate, since the Renewable Fuels Standard distributes biofuel obligations based on each refinery’s output – smaller refiners are forced to acquire fewer RINs. Beyond that, the EPA has stated that no disproportionality can exist when the price of RINs is essentially the same for all participants in a national RINs market on any trading day.
- Even when large refiners blend renewables they produce into their petroleum products rather than buying RINs, they must, and do, reduce their prices based on the value of the RINs they generate internally or be excluded from the competitive fuel market. The EPA calls this “reduction of RINs”, cites numerous supporting analyzes and concludes that the result is no different than if these refiners purchased RINs and passed on their cost. So, despite the surface appearances, small refiners who cannot mix internally are not disadvantaged by refiners who do – the DEH result is the same.
- Nor does the EPA conclude that disproportionate harm stems from the ability of some large refineries to shift monthly production between conventional fuels and renewables in an effort to minimize fuel standard compliance costs. renewable. Each refinery, the EPA noted, is free to purchase the required RINs on a month-to-month basis to smooth out RIN price fluctuations. Treating such alternative business decisions that are not caused by compliance as DEH would undermine the predictability of the Renewable Fuels Standard and turn DEH into insurance for refiners on the losing side of these market bets.
As a result, the EPA denied all pending SRE petitions on structural and factual grounds, stating that in the absence of a compelling DEH demonstration in the face of near-universal industry cost implications, a small refinery “ should not reasonably expect its SRE request to be granted in the future.
The agency mitigated this result by granting a one-time compliance amnesty to some 35 small refiners whose 2018 SREs were issued by the Trump EPA, but later rescinded when the 2018 RINs were no longer available. It reduced the Renewable Fuels Standard requirements for the 2019-2020 pandemic year to free up more RINs for compliance in those years. And he proposed further extended compliance periods in the future, including the ability to use future RINs to meet 2020-2021 obligations, for smaller refiners and others facing potential RIN shortages.
Regulatory taxes tend to achieve equilibrium because they sufficiently subsidize recipients without overburdening the absorptive capacity of taxed entities. This is why they persist. Given the tensions underlying this balance, the EPA denials may be a coda to the SRE litigation saga or a prelude to more of the same.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Michael H. Levin, former National Director of Regulatory Reform at the US EPA, is a Managing Member of the Michael H. Levin Law Group, PLLC in Washington, D.C., and Director of NLGC LLC and Solar Shield LLC, which respectively focus on the training of capital for renewable energy projects and the development of residential rooftop solar installations in the DC metro area. He is the editor of BioCycle Magazine.
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