DC Circuit Forces EPA to Face Reality of RFS Economic Impact on Small Refiners | Vinson & Elkins LLP

On August 14, 2024, the United States Court of Appeals for the District of Columbia (the “D.C. Circuit”) published a redacted copy of its opinion in Sinclair Wyoming Refining Co. LLC v. EPA,¹ in which the D.C. Circuit struck down the U.S. Environmental Protection Agency’s (“EPA” or “Agency”) overly restrictive treatment of the small refinery (“SRE”) exemption under the Renewable Fuel Standard (“RFS”) program and largely reversed a series of denials issued by the EPA in 2022 to SRE petitioners. This opinion, in addition to last year’s decision by the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”) in Calumet Shreveport Refining, LLC v. EPA,² represents a major blow to EPA’s recent efforts to restrict small refiners’ access to SREs. Courts have increasingly scrutinized EPA’s application (or denial) of SREs to refiners, and the Agency will now have to go back to the drawing board to refine its approach to granting or denying SREs.

Analysis Sinclair Wyoming Refining

The RFS program establishes requirements for renewable fuels to be blended with U.S. transportation fuels, and EPA tracks regulated entities’ compliance with credits called Renewable Energy Identification Numbers (“RINs”) that entities must obtain and retire. However, small refiners “may petition (EPA) at any time for an extension of a (separately established) waiver” of their RFS obligations “due to disproportionate economic hardship,” and EPA must, in considering the petition in consultation with the Department of Energy (“DOE”), evaluate the findings of the statutorily required DOE study “and other economic factors.”³ Traditionally, the Environmental Protection Agency (EPA) has used the 2011 DOE study and scoring matrix to evaluate SRE petitions and has, in most cases, granted the petitions when the matrix recommended doing so.⁴ However, following the issuance of an opinion by the United States Court of Appeals for the Tenth Circuit (the “Tenth Circuit”) finding that the EPA made several errors in granting certain petitions (which was reversed in part by the Supreme Court and reversed in its entirety by the Tenth Circuit),⁵ The EPA has radically changed its approach to SRE. In April⁶ and June 2022⁷ The Agency issued two decisions that denied 36 SRE petitions for compliance for 2018 and 69 SRE petitions for compliance for 2016–2021 (the “Denial Decisions”). The denial decisions were based on EPA’s new finding that “disproportionate economic hardship” must be caused solely by compliance with the RFS,⁸ as well as the Agency’s conclusion that small refiners do not experience disproportionate economic hardship under the RFS program because RIN markets are liquid and efficient, allowing regulated entities to purchase RINs “proportionately” and recover RIN costs by passing them on to consumers.⁹

Refineries and others challenged the Denial Orders and related Alternative Compliance Actions. Most of these challenges were consolidated in the District Court of D.C. in Sinclair Wyoming Refiningin which the court largely vacated the Denial Orders. In doing so, the D.C. Circuit held that the Denial Orders were unlawful because EPA’s new approach to SREs impermissibly narrowed the exemption. The court found that EPA’s new approach to “disproportionate economic hardship” (i.e., refiners would be eligible for the SRE extension only if they experienced hardship caused solely by disproportionate RFS compliance costs, which include only RIN costs) was inconsistent with the Clean Air Act (“CAA”). The court explained that this was so because (A) “economic hardship” extends beyond “compliance costs,” and limiting the former to the latter is an impermissibly narrow statutory interpretation; (B) EPA’s exclusive focus on RFS compliance costs functionally reads into its obligation to consider “other economic factors” in addition to economic hardship outside the CAA; and (C) the text of the statute does not require that the economic hardship be caused solely by compliance with the RFS, and EPA’s inconsistent reliance on the Tenth Circuit’s opinion is undermined by vacating that opinion in its entirety.¹⁰ Moreover, as the District Court of Columbia Court of Appeals explained, EPA’s finding that purchases of nontaxable RINs should not be counted as “disproportionate economic hardship” because they constitute a “business choice” that is not driven by RFS compliance is impermissible under the CAA’s flexible approach to RFS compliance.¹¹

The D.C. Circuit also held that the Denial Orders were arbitrary and capricious. The Court explained that EPA (A) previously explained that it believed that phasing out taxable RINs was impracticable and failed to explain its revised position in the Denial Orders that RINs could and should be redeemed and phased out of taxability; (B) used an economic model that relied on “pure speculation” to explain the RIN transition prices for nearly 30% of all transportation fuel sales during the year (i.e., weekend fuel sales); and (C) assumed that RIN costs were immediately passed on to customers, even though the primary study it relied on showed that more than 25% of RIN prices were passed on after the sale date.¹² The District Court of Columbia Court of Appeals separately upheld EPA’s decision to deny two SRE petitions filed by refiners (in which the refiners were otherwise ineligible for an SRE extension) and denied three petitions challenging alternative compliance actions.¹³

Application

As discussed above, with Sinclair Wyoming Refining The DC Circuit rejected two major elements of EPA’s legal and economic analysis of the impact of the RFS program on small refiners. Going forward, EPA must consider economic hardships beyond the costs of RFS compliance (e.g., supply chain costs or geographic region-specific issues) and must go back to the drawing board to analyze the economic impact of the RFS order on small refiners.

^{1 No. 22-1073, 2024 WL 3801747 (DC Cir. July 26, 2024).}

^{2 86 F.4th 1121 (5th Cir. 2023).}

^{3 42 USC § 7545(o)(9)(B)(i)–(ii).}

^{4 See Sinclair Wyoming Ref. LLC2024 WL 3801747, in *3.}

^{5 See Renewable Fuels Association v. EPA948 F.3d 1206 (10th Cir. 2020), rev’d for other reasons sub nom. HollyFrontier Cheyenne Ref., LLC v. Renewable Fuels Ass’n594 U.S. 382 (2021) and abandonedNo. 18-9533, 2021 WL 8269239 (10th Cir. July 27, 2021).}

^{6 See April 2022 Denying Petition for Small Refinery Exemptions Under the Renewable Fuel Standard Program, 87 Fed. Reg. 24,300 (April 25, 2022).}

^{7 See June 2022 Notice of Denial of Petition for Small Refinery Exemptions under the Renewable Fuels Standards Program, 87 Fed. Reg. 34,873 (June 8, 2022).}

^{8 See EPA, EPA-420-D-21-001, Proposed Small Refineries RFS Exemption Rule, pp. 23–26 (December 2021).}

^{9 Id. aged 26–52, 62.}

^{10 Sinclair Wyoming Ref. LLC2024 WL 3801747, at point *6–9.}

^{11 Id. at paras *9-10 (“CAA and Supreme Court precedents make clear that EPA cannot end the small refinery exemption by regulatory order.”).}

^{12 Id. in *10–13 (source omitted).}

^{13 See ID. in the hours *13–24.}