US court sends EPA back to drawing board over RFS exemptions for small refineries

Lengthy delays, novel compliance approaches and a slew of court challenges tied to biofuel blending mandates have left the Environmental Protection Agency with a regulatory and legal headache, further compounded by a recent appeals court decision vacating several denied requests for economic hardship exemptions.

The 5th US Circuit Court of Appeals found Nov. 22 that the EPA's decisions in April 2022 to reject 36 small refinery exemptions and in June 2022 to deny another 69 petitions for exemption from the Renewable Fuel Standard were "impermissibly retroactive, contrary to law, and arbitrary and capricious" (Calumet Shreveport Refining, et al v. EPA, 22-60266).

The ruling applies to the six refineries that brought the case before the 5th Circuit -- Calumet Shreveport Refining, Placid Refining, Ergon Refining, Wynnewood Refining, The San Antonio Refinery and Ergon-West Virginia – and their petitions spanning the 2017 through 2021 RFS compliance years. Those denied petitions were vacated, and the court remanded the matter back to the EPA for further consideration.

SREs were created under the RFS as a safety valve for refineries with a capacity of less than 75,000 b/d, allowing them to apply for waivers to the RFS if meeting the biofuel-blending requirements would create disproportionate financial hardship.

Small oil refineries have argued that they are not on the same footing in terms of RFS compliance as large, integrated oil companies that can export fuel to avoid the RFS altogether or generate excess RFS compliance credits, called RINs, by blending others' fuel and selling those excess RINs in the unregulated $30 billion RIN market. Without SREs, they contend they could go bankrupt or may have to shut down to stay on the right side of the law.

Court's ruling

Since last year, the EPA has relied on an updated interpretation of its Clean Air Act authority pertaining to SREs premised on refiners needing to demonstrate that RFS compliance was the cause of their hardship to qualify for an exemption.

"Retroactive application of EPA's new adjudicative methodology harshly penalizes petitioners for their good-faith and justified reliance on the agency's prior approach," the court said, noting that the December 2021 notice in the Federal Register of planned changes to SRE reviews was published after refineries submitted their SREs.

It also said that the EPA's interpretation that RFS compliance costs must be a refinery's sole cause of disproportionate economic hardship to be granted a waiver was "unreasonable," as it foreclosed on factors such as local economic conditions and refinery-specific circumstances.

The court also found fault with the EPA's RIN-passthrough economic theory that holds that the cost of compliance has been equalized among all market participants and that refineries can offset 100% of their RIN costs by raising the price of their fuel products.

The 5th Circuit found this theory to be "contrary to the evidence," adding that the idea that all refineries can completely pass on their RIN costs "is so implausible as applied to petitioners that it cannot be ascribed to a difference in view or agency expertise."

The 5th Circuit's ruling could spell trouble for how the EPA evaluates SREs, particularly from refineries in the court's district of Louisiana, Mississippi and Texas. But near-identical cases are pending before the DC Circuit and 11th Circuit, raising the potential for a circuit split and possible escalation to the Supreme Court.

Ramifications unclear

"It may take some time for the EPA and the courts to figure out the ramifications of this decision," Joe Kakesh, general counsel for the biofuel group Growth Energy said Nov. 27. "There are multiple litigation matters that are intertwined on these issues at different courts that are still in process. So it's an open question in light of that what EPA will do in response to the 5th Circuit opinion."

The agency has yet to hint at whether it will appeal the Nov. 22 ruling or its next move with regards to its more stringent stance on SREs.

"EPA is reviewing the decision," agency spokesperson Shayla Powell said in an email Nov. 27.

Of note, the EPA had already established an alternative compliance approach for the 31 small refineries whose previously granted SREs were reversed in April 2022, citing "virtually insurmountable obstacles" and "extenuating circumstances" warranting compliance flexibility.

The agency provided the affected refiners with the ability to meet their new 2018 compliance obligations without purchasing or redeeming additional RINs, although that approach is currently being challenged in court by Growth Energy.

And at least some of the petitioners were granted a stay of enforcement of their SREs as early as January of this year, pending the litigation.

As such, the impact to the existing RFS compliance scheme and RIN market from the court's action remains unclear.

A joint statement from the Renewable Fuels Association, Growth Energy, American Coalition for Ethanol and National Farmers Union expressed disappointment with the court's actions.

"All refiners—regardless of their size or location—face equitable RFS obligations, and all of them pass through their costs to comply," the groups said. "This lawsuit was never really about purported economic hardship; rather, it was about a handful of entrenched oil refineries doing everything they can to dodge their legal obligations to blend renewable fuels and block consumer access to lower-cost, lower-carbon options at the pump."

To the contrary, American Fuel & Petrochemical Manufacturers have argued that "Congress understood from the get-go that RFS compliance could impose a disproportionate financial burden on small refineries. Last year's GAO report echoed this and made clear that EPA has erred in past blanket denials of small refinery petitions," a spokesperson for the trade group said.