RFS2: Just One of the Administration's GHG Reduction Strategies

By David A. Crass, William J. Robinson and Anna J. Wi | May 21, 2010
Since the Obama administration took office nearly a year and a half ago, the regulatory environment has undergone a major shift—EPA has taken significant steps, in a short period of time, to regulate greenhouse gas (GHG) emissions. The agency's recent actions include triggering EPA's ability to regulate GHGs pursuant to its authority under the Clean Air Act (CAA) by finalizing the endangerment finding; finalizing the GHG Monitoring and Reporting Rule, the Motor Vehicle Rule and renewable fuel standard (RFS2); in addition to proposing a slew of other rules, including the so-called tailoring rule, which are generally geared toward monitoring and reducing GHG emissions from a number of sources, including vehicles and industrial emitters. For the ethanol industry, the impacts of RFS2, the Motor Vehicle Rule, CAA permitting requirements and the proposed tailoring rule, are coming into focus.

If ethanol-based engine technology can develop fast enough, and EPA makes progress pulling down the blend wall, RFS2 and GHG regulation under the Motor Vehicle Rule could work together to the benefit of the ethanol industry.

To generate renewable identification numbers (RINS) under RFS2, renewable fuels must meet a threshold of at least 20 percent less life cycle GHG emissions than the 2005 baseline emissions for the gasoline or diesel they replace. Under production pathways modeled by EPA, ethanol or butanol from corn starch emits 20 percent less GHG, ethanol from sugarcane emits 50 percent less GHG, and cellulosic ethanol emits 60 percent less GHG. The Motor Vehicle Rule requires vehicle manufacturers to increase fuel efficiency by upwards of 30-40 percent by 2016, starting with model year 2012. EPA estimates these motor vehicle efficiency standards will reduce GHG emissions by 960 million metric tons over the lifetime of the vehicles sold under the program.

In recent years, corn-based ethanol critics have attempted to give the industry a bad rap for poor fuel efficiency and performance in traditional engines. However, the combined effect of RFS2 (requiring use of renewable fuel that emits less GHG) and the Motor Vehicle Rule (requiring that vehicles emit less GHG) should promote the development of vehicle engine technology that can utilize ethanol and increased biofuel blends more efficiently. This, of course, assumes changes in the blend wall.

The proposed tailoring rule would identify which industrial sources will be subject to CAA permitting requirements, and when, based on GHG emission thresholds. As initially proposed, this rule would require every stationary source emitting 25,000 tons of GHG or more annually to obtain a CAA permit. While EPA has since backed off that proposed mandate, indicating that it intends to subject only the largest GHG emitters to CAA permitting first, then phase-in CAA permitting requirements to smaller GHG sources by 2016, a significant number of ethanol producers are likely to be subject to this permitting requirement based on their GHG emissions. The tailoring rule was expected to have been finalized in March; however EPA had not yet published a final rule when this article was written.

While EPA's GHG regulation under RFS2 and the Motor Vehicle Rule pose potential benefits for ethanol producers by supporting ethanol markets, the proposed tailoring rule appears likely to impose additional costs on the production of ethanol. Producers will likely need to keep in mind these various federal efforts to regulate GHG emissions that, on the one hand, support production (such as RFS2) and, on the other hand, may restrict production (such as the tailoring rule) as they make strategic decisions about the feedstock, production pathways and technology they deploy.

David A. Crass is chair of Michael Best & Friedrich's Agribusiness, Food Processing and Distribution Group and a leader in the firm's renewable energy practice. Reach him at (608) 283-2267 or dacrass@michaelbest.com. William J. Robinson is an associate in the firm's Business Practice Group where he focuses on mergers and acquisitions and general corporate law matters. Reach him at (608) 283-2255 or wjrobinson@michaelbest.com. Anna J. Wildeman is a member of the Land and Resources Practice Group where she assists both buyers and sellers in assessing environmental issues. Reach her at (608) 283-0109 or ajwildeman@michaelbest.com.