Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program, 55552-55651 [06-7887]

Agencies

• ENVIRONMENTAL PROTECTION AGENCY

[Federal Register Volume 71, Number 184 (Friday, September 22, 2006)]
[Proposed Rules]
[Pages 55552-55651]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7887]



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Part II





Environmental Protection Agency





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40 CFR Part 80



Regulation of Fuels and Fuel Additives: Renewable Fuel Standard 
Program; Proposed Rule

Federal Register / Vol. 71, No. 184 / Friday, September 22, 2006 / 
Proposed Rules

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-OAR-2005-0161; FRL-8218-8]
RIN 2060-AN76


Regulation of Fuels and Fuel Additives: Renewable Fuel Standard 
Program

AGENCY: Environmental Protection Agency (EPA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: Under the Clean Air Act, as amended by Section 1501 of the 
Energy Policy Act of 2005, the Environmental Protection Agency is 
required to promulgate regulations implementing a renewable fuel 
program. The statute specifies the total volume of renewable fuel that 
needs to be used in each year, with the total volume increasing over 
time. In this context, it is expected to simultaneously reduce 
dependence on foreign sources of petroleum, increase domestic sources 
of energy, and help us make progress in moving beyond a petroleum-based 
economy. The increased use of renewable fuels such as ethanol and 
biodiesel is also expected to have the added benefit of providing an 
expanded market for agricultural products such as corn and soybeans, 
expanding economic benefits for our nation's agricultural sector. Based 
on our analysis, there is also reason to believe that the expanded use 
of renewable fuels will provide reductions in carbon dioxide emissions 
and some air toxics emissions, such as benzene, from the transportation 
sector, while other emissions may increase.
    This action proposes regulations designed to ensure that refiners, 
blenders, and importers of gasoline will use enough renewable fuel each 
year so that this total volume requirement is met. Our proposal 
describes the standard that will apply to these parties and the 
renewable fuels that qualify for compliance. The regulations would also 
establish a trading program that would be a critical aspect of the 
overall program, allowing renewable fuels to be used where they are 
most economical while providing a flexible means for obligated parties 
to comply with the standard.

DATES: Comments: Comments must be received on or before November 12, 
2006. Under the Paperwork Reduction Act, comments on the information 
collection provisions must be received by OMB on or before October 30, 
2006.
    Hearing: A public hearing will be held at 10 a.m. (Central) on 
October 13, 2006 at the Sheraton Gateway Suites Chicago O'Hare in 
Rosemont, IL. To request to speak at a public hearing, send a request 
to the contact in FOR FURTHER INFORMATION CONTACT by October 4, 2006.

ADDRESSES: Comments: Submit your comments, identified by Docket ID No. 
EPA-OAR-2005-0161, by one of the following methods:
     https://www.regulations.gov: Follow the on-line 
instructions for submitting comments.
     E-mail: ASDinfo@epa.gov.
     Mail: U.S. Environmental Protection Agency, EPA West (Air 
Docket), 1200 Pennsylvania Ave., NW., Room B108, Mail Code 6102T, 
Washington, DC 20460, Attention Docket ID No. OAR-2005-0161. Please 
include a total of 2 copies. In addition, please mail a copy of your 
comments on the information collection provisions to the Office of 
Information and Regulatory Affairs, Office of Management and Budget 
(OMB), Attn: Desk Officer for EPA, 725 17th St., NW., Washington, DC 
20503.
     Hand Delivery: EPA Docket Center, EPA/DC, EPA West, Room 
B102, 1301 Constitution Ave., NW., Washington DC. Such deliveries are 
only accepted during the Docket's normal hours of operation, and 
special arrangements should be made for deliveries of boxed 
information.
    Instructions: Direct your comments to Docket ID No. EPA-OAR-2005-
0161. EPA's policy is that all comments received will be included in 
the public docket without change and may be made available online at 
www.regulations.gov, including any personal information provided, 
unless the comment includes information claimed to be Confidential 
Business Information (CBI) or other information whose disclosure is 
restricted by statute. Do not submit information that you consider to 
be CBI or otherwise protected through www.regulations.gov or e-mail. 
The www.regulations.gov Web site is an ``anonymous access'' system, 
which means EPA will not know your identity or contact information 
unless you provide it in the body of your comment. If you send an e-
mail comment directly to EPA without going through www.regulations.gov 
your e-mail address will be automatically captured and included as part 
of the comment that is placed in the public docket and made available 
on the Internet. If you submit an electronic comment, EPA recommends 
that you include your name and other contact information in the body of 
your comment and with any disk or CD-ROM you submit. If EPA cannot read 
your comment due to technical difficulties and cannot contact you for 
clarification, EPA may not be able to consider your comment. Electronic 
files should avoid the use of special characters, any form of 
encryption, and be free of any defects or viruses.
    Docket: All documents in the docket are listed in the 
www.regulations.gov index. Although listed in the index, some 
information is not publicly available, e.g., CBI or other information 
whose disclosure is restricted by statute. Certain other material, such 
as copyrighted material, will be publicly available only in hard copy. 
Publicly available docket materials are available either electronically 
in www.regulations.gov or in hard copy at the EPA Docket Center, EPA/
DC, EPA West, Room B102, 1301 Constitution Ave., NW., Washington, DC. 
This Docket Facility is open from 8:30 a.m. to 4:30 p.m., Monday 
through Friday, excluding legal holidays. The Docket telephone number 
is (202) 566-1742. The telephone number for the Public Reading Room is 
(202) 566-1744.


    Note: The EPA Docket Center suffered damage due to flooding 
during the last week of June 2006. The Docket Center is continuing 
to operate. However, during the cleanup, there will be temporary 
changes to Docket Center telephone numbers, addresses, and hours of 
operation for people who wish to make hand deliveries or visit the 
Public Reading Room to view documents. Consult EPA's Federal 
Register notice at 71 FR 38147 (July 5, 2006) or the EPA Web site at 
https://www.epa.gov/epahome/dockets.htm for current information on 
docket operations, locations and telephone numbers. The Docket 
Center's mailing address for U.S. mail and the procedure for 
submitting comments to www.regulations.gov are not affected by the 
flooding and will remain the same.


    Hearing: The hearing will be held at 10 a.m. (Central) on October 
13, 2006 at the Sheraton Gateway Suites Chicago O'Hare, 6501 North 
Mannheim Road, Rosemont, Illinois 60018. To request to speak at a 
public hearing, send a request to the contact in FOR FURTHER 
INFORMATION CONTACT.

FOR FURTHER INFORMATION CONTACT: Julia MacAllister, U.S. EPA, National 
Vehicle and Fuel Emissions Laboratory, 2000 Traverwood, Ann Arbor, MI 
48105; Telephone (734) 214-4131, FAX (734) 214-4816, E-mail 
macallister.julia@epa.gov.

SUPPLEMENTARY INFORMATION:

I. General Information

A. Does This Action Apply to Me?

    Entities potentially affected by this proposed action include those 
involved

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with the production, distribution and sale of gasoline motor fuel or 
renewable fuels such as ethanol and biodiesel. Regulated categories and 
entities could include:

------------------------------------------------------------------------
                                                         Examples of
          Category             NAICS\1\   SIC \2\        potentially
                                codes      codes     regulated entities
------------------------------------------------------------------------
Industry....................     324110       2911  Petroleum
                                                     Refineries.
Industry....................     325193       2869  Ethyl alcohol
                                                     manufacturing.
Industry....................     325199       2869  Other basic organic
                                                     chemical
                                                     manufacturing.
Industry....................     424690       5169  Chemical and allied
                                                     products merchant
                                                     wholesalers.
Industry....................     424710       5171  Petroleum bulk
                                                     stations and
                                                     terminals.
Industry....................     424720       5172  Petroleum and
                                                     petroleum products
                                                     merchant
                                                     wholesalers.
Industry....................     454319       5989  Other fuel dealers.
------------------------------------------------------------------------
\1\ North American Industry Classification System (NAICS).
\2\ Standard Industrial Classification (SIC) system code.

    This table is not intended to be exhaustive, but provides a guide 
for readers regarding entities likely to be regulated by this action. 
This table lists the types of entities that EPA is now aware could 
potentially be affected by this proposed action. Other types of 
entities not listed in the table could also be affected. To decide 
whether your organization might be affected if this proposed action is 
finalized, you should carefully examine today's notice and the existing 
regulations in 40 CFR part 80. If you have any questions regarding the 
applicability of this action to a particular entity, consult the 
persons listed in the preceding FOR FURTHER INFORMATION CONTACT 
section.

B. What Should I Consider as I Prepare my Comments for EPA?

    1. Submitting CBI. Do not submit this information to EPA through 
www.regulations.gov or e-mail. Clearly mark the part or all of the 
information that you claim to be CBI. For CBI information in a disk or 
CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as 
CBI and then identify electronically within the disk or CD ROM the 
specific information that is claimed as CBI. In addition to one 
complete version of the comment that includes information claimed as 
CBI, a copy of the comment that does not contain the information 
claimed as CBI must be submitted for inclusion in the public docket. 
Information so marked will not be disclosed except in accordance with 
procedures set forth in 40 CFR part 2.
    2. Tips for Preparing Your Comments. When submitting comments, 
remember to:
     Identify the rulemaking by docket number and other 
identifying information (subject heading, Federal Register date and 
page number).
     Follow directions--The agency may ask you to respond to 
specific questions or organize comments by referencing a Code of 
Federal Regulations (CFR) part or section number.
     Explain why you agree or disagree; suggest alternatives 
and substitute language for your requested changes.
     Describe any assumptions and provide any technical 
information and/or data that you used.
     If you estimate potential costs or burdens, explain how 
you arrived at your estimate in sufficient detail to allow for it to be 
reproduced.
     Provide specific examples to illustrate your concerns, and 
suggest alternatives.
     Explain your views as clearly as possible, avoiding the 
use of profanity or personal threats.
     Make sure to submit your comments by the comment period 
deadline identified.
    3. Docket Copying Costs. A reasonable fee may be charged by EPA for 
copying docket materials, as provided in 40 CFR part 2.

Table of Contents

I. Background
    A. The Role of Renewable Fuels in the Transportation Sector
    B. Requirements in the Energy Policy Act
    C. Default Standard Applicable to 2006
    D. Development of the Proposal
II. Overview of the Proposal
    A. Impacts of Increased Reliance on Renewable Fuels
    1. Renewable Fuel Volumes Scenarios Analyzed
    2. Emissions
    3. Economic Impacts
    4. Greenhouse Gases and Fossil Fuel Consumption
    5. Potential Water Quality Impacts
    B. Program Structure
    1. What is the RFS Program Standard?
    2. Who Must Meet the Standard?
    3. What Qualifies as a Renewable Fuel?
    4. Equivalence Values of Different Renewable Fuels
    5. How Will Compliance Be Determined?
    6. How Would the Trading Program Work?
    7. How Would the Program Be Enforced?
    C. Voluntary Labeling Program
III. Complying With the Renewable Fuel Standard
    A. What Is the Standard That Must Be Met?
    1. How Is the Percentage Standard Calculated?
    2. What are the Applicable Standards?
    3. Compliance in 2007
    4. Renewable Volume Obligations
    B. What Counts as a Renewable Fuel in the RFS Program?
    1. What Is a Renewable Fuel That Can Be Used for Compliance?
    a. Ethanol Made From a Cellulosic Feedstock
    b. Ethanol Made From Any Feedstock in Facilities Run Mostly With 
Biomass-Based Fuel
    c. Ethanol That Is Made From the Non-Cellulosic Portions of 
Animal, Other Waste, and Municipal Waste
    2. What Is Biodiesel?
    a. Biodiesel (Mono-Alkyl Esters)
    b. Non-Ester Renewable Diesel
    3. Is Motor Fuel That is Made From a Renewable Feedstock a 
Renewable Fuel?
    4. What Are ``Equivalence Values'' for Renewable Fuel?
    a. Authority Under the Act To Establish Equivalence Values
    b. Energy Content and Renewable Content as the Basis for 
Equivalence Values
    c. Lifecycle Analyses as the Basis for Equivalence Values
    C. What Gasoline Is Used To Calculate the Renewable Fuel 
Obligation and Who Is Required To Meet the Obligation?
    1. What Gasoline Is Used To Calculate the Volume of Renewable 
Fuel Required To Meet a Party's Obligation?
    2. Who Is Required to Meet the Renewable Fuels Obligation?
    3. What Exemptions Are Available Under the RFS Program?
    a. Small Refinery and Small Refiner Exemption
    b. General Hardship Exemption
    c. Temporary Exemption Based on Unforeseen Circumstances
    4. What Are the Opt-in and State Waiver Provisions Under the RFS 
Program?
    a. Opt-in Provisions for Noncontiguous States and Territories
    b. State Waiver Provisions
    D. How Do Obligated Parties Comply With the Standard?
    1. Why Use Renewable Identification Numbers?
    a. RINs Serve the Purpose of a Credit Trading Program

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    b. Alternative Approach to Tracking Batches
    2. Generating RINs and Assigning Them to Batches
    a. Form of Renewable Identification Numbers
    b. Generating Extra-Value RINs
    c. Cases in Which RINs Are Not Generated
    3. Calculating and Reporting Compliance
    a. Using RINs To Meet the Standard
    b. Valid Life of RINs
    c. Cap on RIN Use To Address Rollover
    d. Deficit Carryovers
    4. Provisions for Exporters of Renewable Fuel
    5. How Would the Agency Verify Compliance?
    E. How Are RINs Distributed and Traded?
    1. Distribution of RINs With Batches of Renewable Fuel
    a. Responsibilities of Renewable Fuel Producers and Importers
    b. Responsibilities of Parties That Buy, Sell, or Handle 
Renewable Fuels
    i. Batch Splits
    ii. Batch Mergers
    2. Separation of RINs From Batches
    3. Distribution of Separated RINs
    4. Alternative Approaches to RIN Distribution
    a. Producer With Direct Transfer of RINs
    b. Producer With Open RIN Market
    c. First Purchaser
    d. Owner at Time of Blending
    e. Blender at Time of Blending
IV. Registration, Recordkeeping, and Reporting Requirements
    A. Introduction
    B. Requirements for Obligated Parties and Exporters of Renewable 
Fuels
    1. Registration
    2. Reporting
    3. Recordkeeping
    C. Requirements for Producers and Importers of Renewable Fuel
    1. Registration
    2. Reporting
    3. Recordkeeping
    D. Requirements for Other Parties Who Own RINs
    1. Registration
    2. Reporting
    3. Recordkeeping
V. What Acts Are Prohibited and Who Is Liable for Violations?
VI. Current and Projected Renewable Fuel Production and Use
    A. Overview of U.S. Ethanol Industry and Future Production/
Consumption
    1. Current Ethanol Production
    2. Expected Growth in Ethanol Production
    3. Current Ethanol and MTBE Consumption
    4. Expected Growth in Ethanol Consumption
    B. Overview of Biodiesel Industry and Future Production/
Consumption
    1. Characterization of U.S. Biodiesel Production/Consumption
    2. Expected Growth in U.S. Biodiesel Production/Consumption
    C. Feasibility of the RFS Program Volume Obligations
    1. Production Capacity of Ethanol and Biodiesel
    2. Production Capacity of Cellulosic Ethanol
    3. Renewable Fuel Distribution System Capability
VII. Impacts on Cost of Renewable Fuels and Gasoline
    A. Renewable Fuel Production and Blending Costs
    1. Ethanol Production Costs
    a. Corn Ethanol
    b. Cellulosic Ethanol
    c. Ethanol's Blending Cost
    2. Biodiesel Production Costs
    3. Diesel Fuel Costs
    B. Distribution Costs
    1. Ethanol Distribution Costs
    a. Capital Costs To Upgrade Distribution System for Increased 
Ethanol Volume
    b. Ethanol Freight Costs
    2. Biodiesel Distribution Costs
    C. Estimated Costs to Gasoline
    1. RVP Cost for Blending Ethanol Into Summertime RFG
    2. Cost Savings for Phasing Out Methyl Tertiary Butyl Ether 
(MTBE)
    3. Production of Alkylate From MTBE Feedstocks
    4. Changes in Refinery Produced Gasoline Volume and Its Costs
    5. Overall Impact on Fuel Cost
    a. Cost Without Ethanol Subsidies
    b. Gasoline Costs Including Ethanol Consumption Tax Subsidies
    c. Cost Sensitivity Case Assuming $70 per Barrel Crude Oil
VIII. What Are the Impacts of Increased Ethanol Use on Emissions and 
Air Quality?
    A. Effect of Renewable Fuel Use on Emissions
    1. Emissions From Gasoline Fueled Motor Vehicles and Equipment
    a. Gasoline Fuel Quality
    b. Emissions From Motor Vehicles
    c. Nonroad Equipment
    2. Diesel Fuel Quality: Biodiesel
    3. Renewable Fuel Production and Distribution
    B. Impact on Emission Inventories
    1. Primary Analysis
    2. Sensitivity Analysis
    3. Local and Regional VOC and NOX Emission Impacts in 
July
    C. Impact on Air Quality
    1. Impact of 7.2 Billion Gallon Ethanol Use on Ozone
    2. Particulate Matter
IX. Impacts on Fossil Fuel Consumption and Related Implications
    A. Lifecycle Modeling
    1. Modifications to GREET Assumptions
    a. Wet-Mill Versus Dry Mill Ethanol Plants
    b. Coal Versus Natural Gas in Ethanol Plants
    c. Ethanol Production Yield
    2. Controversy Concerning the Ethanol Energy Balance
    B. Overview of Methodology
    1. Amount of Conventional Fuel Replaced By Renewable Fuel (R)
    2. Lifecycle Impacts of Conventional Fuel Use (LC)
    3. Displacement Indexes (DI)
    C. Impacts of Increased Renewable Fuel Use
    1. Fossil Fuels and Petroleum
    2. Greenhouse Gases and Carbon Dioxide
    D. Implications of Reduced Imports of Petroleum Products
X. Agricultural Sector Economic Impacts
XI. Public Participation
XII. Administrative Requirements
    A. Executive Order 12866: Regulatory Planning and Review
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    1. Overview
    2. Background--Small Refiners Versus Small Refineries
    3. Summary of Potentially Affected Small Entities
    4. Impact of the Regulations on Small Entities
    5. Small Refiner Outreach
    6. Conclusions
    D. Unfunded Mandates Reform Act
    E. Executive Order 13132: Federalism
    F. Executive Order 13175: Consultation and Coordination With 
Indian Tribal Governments
    G. Executive Order 13045: Protection of Children From 
Environmental Health and Safety Risks
    H. Executive Order 13211: Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use
    I. National Technology Transfer Advancement Act
XIII. Statutory Authority

I. Background

    This section describes the required elements of the renewable fuel 
program, also known as the Renewable Fuel Standard (RFS) program, as 
stipulated in Section 211(o) of the Clean Air Act (CAA) as amended by 
the Energy Policy Act of 2005 (the Energy Act or the Act).

A. The Role of Renewable Fuels in the Transportation Sector

    Renewable fuels have been an important part of our nation's 
transportation fuel supply for many years. Following the CAA amendments 
of 1990, the use of renewables fuels, particularly ethanol, increased 
dramatically. Several key clean fuel programs required by the CAA 
established new market opportunities for ethanol. A very successful 
mobile source control strategy, the reformulated gasoline (RFG) 
program, was implemented in 1995. This program set stringent new 
controls on the emissions performance of gasoline, which were designed 
to significantly reduce summertime ozone precursors and year round air 
toxics emissions. The RFG program also required that RFG meet an oxygen 
content standard. Several areas of the country began blending ethanol 
into gasoline to help meet this new standard, such as Chicago and St. 
Louis. Another successful clean fuel strategy required certain areas 
exceeding the national ambient air quality standard for carbon monoxide 
to also meet an oxygen content standard during the winter time to 
reduce harmful carbon

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monoxide emissions. Many of these areas also blended ethanol during the 
winter months to help meet this new standard, such as Denver and 
Phoenix. As a result of these programs, and other factors, currently 
all areas requiring RFG or winter oxygenated fuels are blending ethanol 
at some level to support meeting the clean fuel requirements.
    Today, the role and importance of renewable fuels in the 
transportation sector continues to expand. In the past several years as 
crude oil prices have soared above the lower levels of the 1990's, the 
relative economics of renewable fuel use has improved dramatically. In 
addition, since the vast majority of crude oil produced in or imported 
into the U.S. is consumed as gasoline or diesel fuel in the U.S., 
concerns about our dependence on foreign sources of crude oil has 
renewed interest in renewable transportation fuels. The passage of the 
Energy Policy Act of 2005 demonstrated a strong commitment on the part 
of U.S. policymakers to consider additional means of supporting 
renewable fuels as a supplement to petroleum-based fuels in the 
transportation sector. The RFS program is such a program.
    The RFS program was debated by the U.S. Congress over several years 
before finally being enacted through passage of the Energy Policy Act 
of 2005. The RFS program is first and foremost designed to increase the 
use of renewable fuels in motor vehicle fuels consumed in the U.S. In 
this context, it is expected to simultaneously reduce dependence on 
foreign sources of petroleum, increase domestic sources of energy, and 
diversify our energy portfolio to help in moving beyond a petroleum-
based economy.
    The increased use of renewable fuels such as ethanol and biodiesel 
is also expected to have the added benefit of providing an expanded 
market for agricultural products such as corn and soybeans. Based on 
our analysis, there is also an expectation that the expanded use of 
renewable fuels will provide reductions in carbon dioxide emissions and 
air toxics emissions such as benzene from the transportation sector, 
while other emissions such as hydrocarbons and oxides of nitrogen may 
increase.
    The level of the renewable fuels standard set forth by Congress 
works in conjunction with other provisions that were enacted as part of 
the Energy Act. In particular, the level of the renewable fuel standard 
more than offset the possible loss in demand for renewable fuels 
occasioned by the Act's repeal of the oxygen content mandate in the 
reformulated gasoline program while allowing greater flexibility in how 
renewable fuels were blended into the nation's fuel supply. The 
renewable fuel standard additionally created a specific annual level 
for minimum renewable fuel use which increases over time, ensuring 
overall growth in the demand and opportunity for renewable fuels.
    Because renewable fuels such as ethanol and biodiesel are not new 
to the U.S. transportation sector, the expansion of their use is 
expected to follow distribution and blending practices already in 
place. For instance, the market already has the necessary production 
and distribution mechanisms in place in many areas, and the ability to 
expand these mechanisms into new markets. Recent spikes in ethanol use 
resulting first from the state MTBE bans, and now the virtual 
elimination of MTBE from the marketplace, have tested the limits of the 
ethanol distribution system. However, future growth is expected to move 
in a more orderly fashion since the use of renewable fuels will not be 
geographically constrained and, given EIA volume projections, 
investment decisions can follow market forces rather than regulatory 
mandates. In addition, the increased production volumes of ethanol and 
the expanded penetration of ethanol in new markets may create new 
opportunities for blending of E85, a blend of 85 percent ethanol and 15 
percent gasoline, in the long run. The increased availability of E85 
will mean that more flexible fueled vehicles (FFV) can use this fuel. 
Of the approximately 5 million FFVs currently in use in the U.S, most 
are currently fueled with conventional gasoline rather than E85, in 
part due to the limited availability of E85.
    Given the ever-increasing demand for petroleum-based products in 
the transportation sector, the RFS program is an important first step 
in U.S. efforts to move toward energy independence. The RFS standard 
provides the certainty that at least a minimum amount of renewable fuel 
will be used in the U.S., which in turn provides investment certainty 
for the growth in production capacity of renewable fuels. However, the 
RFS program is not the only thing impacting demand for ethanol and 
other renewable fuels. As Congress was developing the RFS program in 
the Energy Act, several large states were adopting and implementing 
bans on the use of MTBE in gasoline. As a result, refiners were forced 
to switch to ethanol to satisfy the oxygen content mandate for their 
reformulated gasoline in the U.S., causing a large, quick increase in 
demand for ethanol. Even more importantly, with the removal of the 
oxygen content mandate for RFG, refiners elected to remove essentially 
all MTBE from the gasoline supply in the U.S. during the spring of 
2006. In order to accomplish this transition quickly, while still 
maintaining gasoline volume, octane, and gasoline air toxics 
performance standards, refiners elected to blend ethanol into virtually 
all reformulated gasoline nationwide. This caused a second dramatic 
increase in demand for ethanol, which in the near term has been met by 
temporarily shifting large volumes of ethanol out of conventional 
gasoline and into the RFG areas. Perhaps the largest impact on 
renewable fuel demand, however, has been the dramatic increase in the 
cost of crude oil. In the last few years, both crude oil prices and 
crude oil price forecasts have increased dramatically. This has 
resulted in a large economic incentive for the use of ethanol and 
biodiesel. The Energy Information Administration (EIA) and others are 
currently projecting renewable fuel demand to exceed the minimum 
volumes required under the RFS program by a substantial margin. In this 
context, the statutory goal of the RFS program is to provide an 
important foundation for ongoing investment in renewable fuel 
production. However, market demand for renewable fuels is expected to 
exceed the statutory minimums. We believe we are proposing a program 
structure that could continue to operate effectively regardless of the 
level of renewable fuel use or market conditions in the energy sector.

B. Requirements in the Energy Policy Act

    Section 1501 of the Energy Policy Act provides the statutory basis 
for the RFS program. This provision was added to the CAA as Section 
211(o). It requires EPA to establish a program to ensure that the pool 
of gasoline sold in the contiguous 48 states contains specific volumes 
of renewable fuel for each calendar year starting with 2006. The 
required overall volumes for 2006 through 2012 are shown in Table I.B-1 
below.

Table I.B-1.--Applicable Volumes of Renewable Fuel Under the RFS Program
------------------------------------------------------------------------
                                                              Billion
                      Calendar year                           gallons
------------------------------------------------------------------------
2006....................................................             4.0
2007....................................................             4.7
2008....................................................             5.4
2009....................................................             6.1
2010....................................................             6.8
2011....................................................             7.4

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2012....................................................             7.5
------------------------------------------------------------------------

    In order to ensure the use of the total renewable fuel volume 
specified for each year, the Agency must set a standard for each year 
representing the amount of renewable fuel that a refiner, blender, or 
importer must use, expressed as a percentage of gasoline sold or 
introduced into commerce. This yearly percentage standard is to be set 
at a level that will ensure that the total renewable fuel volumes shown 
in Table I.B-1 will be used based on gasoline volume projections 
provided by the Energy Information Administration (EIA). The standard 
for each year must be published in the Federal Register by November 30 
of the previous year. Starting with 2013, EPA is required to establish 
the applicable national volume, based on the criteria contained in the 
statute, which must require at least the same overall percentage of 
renewable fuel use as was required in 2012.
    Renewable fuels are defined in the Act primarily on the basis of 
the feedstock. In general, renewable fuels must be a motor vehicle fuel 
that is produced from plant or animal products or wastes, as opposed to 
fossil fuel sources. The Act specifically identifies several types of 
motor vehicle fuels as renewable fuels, including cellulosic biomass 
ethanol, waste-derived ethanol, biogas, biodiesel, and blending 
components derived from renewable fuel.
    The standard set annually by EPA is to be a single percentage 
applicable to refiners, blenders, and importers, as appropriate. The 
percentage standard is used by obligated parties to determine a volume 
of renewable fuel that they are responsible for ensuring is introduced 
into the domestic gasoline pool for the given year. The percentage 
standard must be adjusted such that it does not apply to multiple 
parties for the same volume of gasoline. The standard must also take 
into account the fact that small refineries are exempted from the 
program until 2011, but must take into account the use of renewable 
fuel by those small refineries.
    Under the Act, the required volumes in Table I.B-1 apply to the 
contiguous 48 states. However, Alaska and Hawaii can opt into the 
program, in which case the pool of gasoline used to calculate the 
standard, and the number of regulated parties, would change. In 
addition, other states can request a waiver of the RFS program under 
certain conditions, which would affect the national quantity of 
renewable fuel required under the program.
    The Act requires the Agency to promulgate a credit trading program 
for the RFS program whereby an obligated party may generate credits for 
over complying with their annual obligation. The obligated party can 
then use these credits or trade them for use by another obligated 
party. Thus the credit trading program allows obligated parties to 
comply in the most cost-effective manner by permitting them to 
generate, transfer, and use credits. The trading program also permits 
renewable fuels that are not blended into gasoline, such as biodiesel, 
to participate in the RFS program.
    The Agency must also determine who can generate credits and under 
what conditions, how credits may be transferred from one party to 
another, and in certain cases the appropriate value of credits for 
different types of renewable fuel. If a party is not able to generate 
or purchase sufficient credits to meet their annual obligation, they 
are allowed to carry over the deficit to the next annual compliance 
period, but must achieve full compliance in that following year.

C. Default Standard Applicable to 2006

    The Energy Act was enacted in August of 2005 and included 
provisions for a renewable fuel program that was to begin in January of 
2006. We recognized that a rulemaking implementing the full RFS 
program, including both program design and the various analyses 
necessary, would require a substantial effort involving many 
stakeholders. This process was expected to take longer than one year, 
and as a result we knew it would not be completed in time to be 
implemented by January of 2006.
    The Energy Act anticipated this possibility and specified a default 
standard applicable for just 2006. The default standard specified that 
the percentage of renewable fuel in gasoline sold or dispensed to 
consumers in the U.S. in calendar year 2006 must be 2.78 volume 
percent.\1\ The default standard would be applicable if the Agency did 
not promulgate regulations to implement the full RFS program for 2006. 
Since the full program could not be promulgated during 2006, the 
default standard of 2.78 percent applies to calendar year 2006.
    However, the provision for the default standard in the Act does not 
provide adequate specificity on how to implement the default standard. 
For instance, the Act's default standard provision does not specify the 
liable parties and the specific nature of their obligation. It also 
does not discuss compliance mechanisms, reporting requirements, or 
credit generation and use. The resulting uncertainty associated with 
the default standard would have created confusion and risked a 
problematic initial implementation of the RFS program.
---------------------------------------------------------------------------

    \1\ The default standard of 2.78 percent represented 
approximately 4.0 billion gallons of renewable fuel.
---------------------------------------------------------------------------

    As a result, the Agency published a rule on December 30, 2005 that 
interpreted and implemented the default provision, to provide certainty 
to parties involved in the production and distribution of gasoline and 
renewable fuels.\2\ In that action, the Agency clarified the default 
standard for 2006 with regulations identifying the liable parties as 
refiners, importers, and blenders. The default standard was interpreted 
as establishing a collective obligation, rather than an individual 
obligation. Under this interpretation, refiners, blenders, and 
importers are responsible as a group for meeting the default 2.78 
percent standard, and compliance with this standard is calculated over 
the pool of all gasoline sold to consumers. An individual refiner, 
blender, or importer is not responsible for meeting the 2.78 percent 
standard for the specific gasoline it produces. The regulations 
implementing the default standard for 2006 did not include any 
provisions for credit generation or trading, given the collective 
nature of the obligation. However, any shortfall in renewable fuel 
production in 2006 would be added as a deficit carryover to the 
standard for 2007. Based on information available to date, this does 
not appear to be necessary. Total ethanol production in the U.S. 
exceeded 4.0 billion gallons in 2005 by a small margin, and several 
hundred million gallons of additional ethanol production capacity has 
come online in 2006. Thus it is anticipated that the total ethanol 
production volume and ultimate use in 2006 will be more than sufficient 
to meet the default standard of 2.78 percent.
    Today's proposal outlines the full RFS program, covering all of the 
provisions required in the Act. It applies in calendar year 2007 and 
beyond, since the direct final rule described above addresses RFS 
compliance for 2006 only.
---------------------------------------------------------------------------

    \2\ 70 FR 77325 (December 30, 2005).
---------------------------------------------------------------------------

D. Development of the Proposal

    The RFS program was prescribed in section 1501 of the Act, 
including the

[[Page 55557]]

required total volumes, the timing of the obligation, the parties who 
are obligated to comply, the definition of renewable fuel, and the 
general framework for a credit program. As with many legislative 
actions, various aspects of the program require additional development 
by the Agency beyond the specifications in the Act. The credit trading 
program and related compliance mechanisms are a central aspect of the 
program, and the Agency is responsible for developing regulations to 
ensure the successful implementation of the RFS program, based on the 
framework spelled out in the statute.
    Under the RFS program the credit trading provisions will comprise a 
critical element of compliance. Many obligated parties do not have easy 
access to renewable fuels or the ability to blend them, and so will 
rely on the use of credits to comply. The RFS credit program is also 
unique in that the parties liable for meeting the standard (refiners, 
importers, and blenders of gasoline) are not generally the parties who 
make the renewable fuels or blend them into gasoline. This creates the 
need for trading mechanisms that ensure that the means to demonstrate 
compliance will be readily available for use by obligated parties.
    Given these considerations, the first step we took in developing 
the proposed program was to seek input and recommendations from the 
affected stakeholders. There were initially a wide range of thoughts 
and views on how to design the program. However, there was broad 
consensus that in the end the program should satisfy a number of 
guiding principles, including for example that the compliance and 
trading program should provide certainty to the marketplace and 
minimize cost to the consumers; that the program should preserve 
existing business practices for the production, distribution, and use 
of both conventional and renewable fuels; that the program should be 
designed to accommodate all qualifying renewable fuels; that all 
renewable volumes produced are made available to obligated parties for 
compliance; and finally that the Agency should have the ability to 
easily verify compliance to ensure that the volume obligations are in 
fact met. Over the course of several months, these guiding principles 
helped to move us toward today's proposal.

II. Overview of the Proposal

    Today's action describes our proposed requirements for the RFS 
program, as well as a preliminary assessment of the environmental and 
economic impacts of the nation's transition to greater use of renewable 
fuels. This section provides an overview of our proposal and renewable 
fuel impacts assessment. Sections III through V provide the details of 
the proposed structure of the program, while Sections VI through X 
describe our preliminary assessment of the impacts on emissions, air 
quality, fossil fuel use, and cost resulting from expanded renewable 
fuel use.

A. Impacts of Increased Reliance on Renewable Fuels

    In a typical major rulemaking, EPA would conduct a full assessment 
of the economic and environmental impacts of the program. However, as 
discussed in Section I.A., the replacement of MTBE with ethanol and the 
extremely favorable economics for renewable fuels brought on by the 
rise in crude oil prices are causing renewable fuel use to far exceed 
the RFS requirements. This makes an assessment of the program of 
limited if any utility, given that it is not currently driving real 
world impacts and future projections by the Energy Information 
Administration indicate that this favorable condition will continue. 
Consequently, it is of greater relevance and interest to assess the 
impacts of this larger increase in renewable use and the related 
changes occurring to gasoline. For this reason we have carried out an 
assessment of the economic and environmental impacts of the broader 
changes in fuel quality resulting from our nation's transition to 
greater utilization of renewable fuels, as opposed to an assessment of 
the RFS program itself.
    In summary, depending on the volume of renewable fuel assumed to be 
used in 2012 (7.5 to 9.9 billion gallons), we estimate that this 
transition to renewable fuels will reduce petroleum consumption by 2.3 
to 3.9 billion gallons or approximately 1.0 to 1.6 percent of the 
petroleum that would otherwise be used by the transportation sector. 
Carbon monoxide emissions from gasoline powered vehicles and equipment 
will be reduced by 1.3 to 3.6 percent while emissions of benzene (a 
mobile source air toxic) will be reduced by 1.7 to 6.2 percent. At the 
same time, other emissions may increase. Nationwide, we estimate 
between a 28,000 and 97,000 ton increase in VOC + NOX 
emissions. However, the effects will vary significantly by region with 
some major areas like New York City, Chicago and Los Angeles 
experiencing no increase while other areas may see an increase in VOC 
emissions from 3 to 5 percent and an increase in NOX 
emissions from 4 to 6 percent from gasoline powered vehicles and 
equipment. Furthermore, the use of renewable fuel will reduce 
CO2 equivalent greenhouse gas emissions by 9 to 14 million 
tons, about 0.4 to 0.6 percent of the anticipated greenhouse gas 
emissions from the transportation sector in the United States in 2012. 
On average, we estimate the cost of this increase in renewable fuel to 
range from 0.3 cents per gallon to 1 cent per gallon of gasoline for 
the nation as a whole. We anticipate additional impacts that we intend 
to evaluate as part of the final rulemaking, including changes in 
renewable fuel feedstock market prices, decreased imports of petroleum, 
and effects on energy security.
    To carry out our analyses, we elected to use 2004 as the baseline 
from which to compare the impacts of expanded renewable use. We chose 
2004 as a baseline primarily due to the fact that all the necessary 
refinery production data, renewable production data, and fuel quality 
data was already in hand at the time we needed to begin the analysis. 
We did not use 2005 as a baseline year because 2005 may not be an 
appropriate year for comparison due to the extraordinary impacts of 
hurricanes Katrina and Rita on gasoline production and use. To assess 
the impacts of anticipated increases in renewable fuels, we elected to 
look at what they would be in 2012, the year the statutorily-mandated 
renewable fuel volumes will be fully phased in. By conducting the 
analysis in this manner, the impacts include not just the impact of 
expanded renewable fuel use by itself, but also the corresponding 
decrease in the use of MTBE, and the potential for oxygenates to be 
removed from RFG due to the absence of the RFG oxygenate mandate. Since 
these three changes are all inextricably linked and are occurring 
simultaneously in the marketplace, evaluating the impacts in this 
manner is appropriate.
    We evaluated the impacts of expanded renewable use and the 
corresponding changes to the fuel supply on fuel costs, consumption of 
fossil fuels, and some of the economic impacts on the agricultural 
sector. We also evaluated the impacts on emissions, including 
greenhouse gas emissions, and the corresponding impacts on nationwide 
and regional air quality. Our preliminary analyses are summarized in 
this section. There are a number of uncertainties associated with this 
preliminary assessment. The analyses described here will be updated for 
the final rule including additional investigation into these 
uncertainties.

[[Page 55558]]

1. Renewable Fuel Volumes Scenarios Analyzed
    As shown in Table I.B-1, the Act stipulates that the nationwide 
volumes of renewable fuel required under the RFS program must be at 
least 4.0 billion gallons in 2006 and increase to 7.5 billion gallons 
in 2012. However, we expect that the volume of renewable fuel will 
actually exceed the required volumes by a significant margin. Based on 
economic modeling, EIA projects renewable demand in 2012 of 9.6 billion 
gallons for ethanol, and 300 million gallons for biodiesel using crude 
oil prices forecast at $47 per barrel. Therefore, in assessing the 
impacts of expanded use of renewable fuels, we evaluated two 
comparative scenarios, one representing the statutorily required 
minimum, and one reflecting the higher levels projected by EIA. 
Although the actual renewable fuel volumes produced in 2012 may differ 
from both the required and projected volumes, we believe that these two 
volume scenarios together represent a reasonable range for analysis 
purposes.
    The Act also stipulates that at least 250 million gallons out of 
the total volume required in 2013 and beyond must be cellulosic biomass 
ethanol. Because we anticipate a ramp-up in production of cellulosic 
biomass ethanol products in the coming years, we have assumed that 250 
million gallons of ethanol in 2012 will come from a cellulosic biomass 
source. Also, EIA has projected in their economic modeling a biodiesel 
demand in 2012 of 300 million gallons. Thus for both the required and 
projected volume scenarios that we evaluated for 2012, we assumed these 
same production volumes for cellulosic biomass ethanol and biodiesel.
    As discussed above, we chose 2004 as our baseline. However, a 
direct comparison of the fuel quality impacts on emissions and air 
quality required that changes in overall fuel volume, fleet 
characterization, and other factors be constant. Therefore, we 
developed a reference case which represents the fuel volume, fleet 
characterization, and other factors expected in 2012. Fuel quality was 
maintained by simply growing ethanol use in equal proportion to growth 
in gasoline demand through 2012.
    A summary of the assumed renewable fuel volumes for the scenarios 
we compared is shown in Table II.A.1-1.

                                Table II.A.1.-1--Renewable Fuel Volume Scenarios
                                                [billion gallons]
----------------------------------------------------------------------------------------------------------------
                                                                                          2012
                                                                       -----------------------------------------
                                                            2004 Base                      RFS
                                                              case        Reference     required      Projected
                                                                            case         volume        volume
----------------------------------------------------------------------------------------------------------------
Corn-ethanol............................................         3.5           3.9            6.95          9.35
Cellulosic ethanol......................................         0             0              0.25          0.25
Biodiesel...............................................         0.025         0.028          0.3           0.3
                                                         -------------------------------------------------------
    Total volume........................................         3.025         3.928          7.5           9.9
----------------------------------------------------------------------------------------------------------------

2. Emissions
    We evaluated the impacts of increased use of ethanol and biodiesel 
on emissions and air quality in the U.S. relative to the 2012 reference 
case. For the nation as a whole, we estimated that summertime VOC and 
NOX emissions from gasoline and diesel vehicles and 
equipment would each increase by about 0.5 percent for the 7.5 billion 
gallon scenario, and by about 1.0 percent for the 9.9 billion gallon 
scenario. This would be equivalent to between 28,000 and 97,000 tons of 
VOC + NOX nationwide. However, the effects will vary by 
region. For instance, for areas in which 10 percent ethanol blends 
already predominated in 2004, such as New York City, Chicago, and Los 
Angeles, if they continue to use ethanol at the same levels there will 
be no impact. However, for conventional gasoline areas in which no 
ethanol was used in 2004 but which are projected to transition to full 
use of ethanol in 2012, we estimated that VOC and NOX 
emissions from gasoline vehicles and equipment would increase by 3-5 
percent and 4-6 percent, respectively.
    Unlike VOC and NOX, emissions of CO and benzene from 
gasoline and diesel vehicles and equipment were estimated to decrease 
when the use of renewable fuels increased. Reductions in emissions of 
CO varied from as low as 1.3 percent to as high as 3.6 percent for the 
nation as a whole, depending on both the renewable fuel volume scenario 
and assumptions regarding the amount of ethanol used in reformulated 
versus conventional gasoline. Benzene emissions from gasoline vehicles 
and equipment were estimated to be reduced from 1.7 to 6.2 percent.
    We do not have sufficient data to predict the effect of ethanol use 
on levels of either directly emitted particulate matter (PM) or 
secondarily formed PM, but do expect a net reduction in ambient PM 
levels to result due to the secondary PM impacts as discussed in 
section VIII.C. However, data on direct PM emission impacts is 
available for biodiesel. We estimate that reductions in emissions of 
direct PM from the projected increase in the use of biodiesel to be 
about 100 tons nationwide, equivalent to less than 0.5 percent of the 
diesel PM inventory.
    The emission impact estimates described above are based on the best 
available data and models. However, it must be highlighted that most of 
the fuel effect estimates are based on very limited or old data which 
may no longer be reliable in estimating the emission impacts on 
vehicles in the 2012 fleet with advanced emission controls. \3\ As 
such, these emission estimates should be viewed as preliminary. EPA 
hopes to conduct significant new testing in order to better estimate 
the impact of fuel changes on emissions from both highway vehicles and 
nonroad equipment, including those fuel changes brought about by the 
use of renewable fuels. We hope to be able to incorporate the data from 
such additional testing into the analyses for other studies required by 
the Energy Act in 2008 and 2009, and into a subsequent rule to set the 
RFS program standard for 2013 and later.
---------------------------------------------------------------------------

    \3\ Advanced emission controls include close-coupled, high 
density catalysts and their associated electronic control systems 
for light-duty vehicles, and NOX adsorbers and PM traps 
for heavy-duty engines.
---------------------------------------------------------------------------

    We used the Ozone Response Surface Model (RSM) to estimate the 
impacts of increased use of ethanol on ozone levels for the 7.5 billion 
gallon use scenario representing the required volumes

[[Page 55559]]

under the RFS program. We did not evaluate other renewable fuel volumes 
scenarios due to the limited amount of time available for completing 
this NPRM. The ozone RSM approximates the effect of VOC and 
NOX emissions in a 37-state eastern area of the U.S. Using 
this model, we projected that the changes in VOC and NOX 
emissions could produce a very small increase in ambient ozone levels. 
On average, ozone levels increased by 0.06 ppb, which represents less 
than 0.1 percent of the standard. Even for areas expected to experience 
a significant increase in ethanol use, ozone levels increased by only 
0.1-0.2 ppb, less than 0.2 percent of the standard. These ozone impacts 
do not consider the reductions in CO emissions mentioned above, or the 
change in the types of compounds comprising VOC emissions. 
Directionally, both of these effects may mitigate these already small 
ozone increases. The ozone impacts also do not consider the impact of 
increased emissions from ethanol and biodiesel production facilities or 
any corresponding decrease in emissions from refineries.
    We investigated several other issues related to emissions and air 
quality that could affect our estimates of the impacts of increased use 
of renewable fuels. These are discussed in section VIII and in greater 
detail in the draft Regulatory Impact Analysis (DRIA). For instance, 
our current models assume that recent model year vehicles are 
insensitive to many fuel changes. However, a limited amount of new test 
data suggests that newer vehicles may be just as sensitive as older 
model year vehicles. Our sensitivity analysis suggests that if this is 
the case VOC emissions could decrease slightly while NOX 
would still increase. We also evaluated the emissions from the 
production of both ethanol and biodiesel fuel and determined that they 
will also increase with increased use of these fuels. Nationwide, 
emissions related to the production and distribution of ethanol and 
biodiesel fuel are expected to be of the same order of magnitude as the 
emission impacts related to the use of these fuels in vehicles. 
Finally, a lack of emission data and atmospheric modeling tools 
prevented us from making specific projections of the impact of 
renewable fuels on ambient PM levels. However, ethanol use may have an 
affect on ambient PM levels. Emerging science indicates that aromatic 
VOC emissions react in the atmosphere to form PM. Increased ethanol use 
is expected to cause a corresponding reduction in the aromatic content 
of gasoline, which should reduce aromatic VOC emissions and therefore 
potentially also impact atmospheric PM levels. All of these issues will 
be the subject of further study and analysis in the future.
3. Economic Impacts
    As discussed in more detail in Section X, for the final rule we 
also plan to assess a range of economic impacts that could result from 
the expanded use of renewable fuels. Due to the time required to 
complete these analyses, we only have preliminary data for some of 
these impacts available for this proposal.
    In Section VII of this preamble, we estimate the cost of producing 
the extra volumes of renewable fuel anticipated through 2012. For corn 
ethanol, we estimate the per gallon cost of ethanol to range from $1.20 
per gallon in 2012 (2004 dollars) in the case of the 7.2 billion 
gallons per year case and $1.26 per gallon in the case of the 9.6 
billion gallon case. These costs take into account the cost of the 
feedstock (corn), plant equipment and operation and the value of any 
co-products (distiller's dried grain and solubles, for example). For 
biodiesel, we estimate the per gallon cost to be between $1.89 and 
$2.11 per gallon if produced using soy bean oil, and less if using 
yellow grease or other relatively low cost or no-cost feedstocks. All 
of these fuel production costs are without accounting for tax subsidies 
for these renewable fuels.\4\ We also note that these costs represent 
the production cost of the fuel and not the market price. In recent 
years, the prices of ethanol and biodiesel have tended to track the 
prices of gasoline and diesel, in some cases even exceeding those 
prices.
---------------------------------------------------------------------------

    \4\ Tax subsidies were subtracted out of the cost estimates, but 
consumer behavior in the absence of these tax subsidies was not 
modeled.
---------------------------------------------------------------------------

    These renewable feedstocks are then used as blend fuels in gasoline 
and diesel. While biodiesel is typically just blended with petroleum 
diesel, additional efforts are sometimes necessary and/or economically 
advantageous at the refiner level when adding ethanol to gasoline. For 
example, ethanol's high octane reduces the need for other octane 
enhancements by the refiner, whereas offsetting the volatility increase 
caused by ethanol may require removal of other highly volatile 
components. Section VII examines these fuel cost impacts and concludes 
that the net cost to society in 2012 in comparison to the reference 
case of the increased use of renewable fuels and their replacement of 
MTBE, will range from an estimate of 0.3 cent to 1 cent per gallon of 
gasoline.
    This fuel cost impact does not consider other societal benefits. 
For example, the petroleum-based fuel displaced by renewable fuel, 
largely produced in the United States, should reduce our use of 
imported oil and fuel. We estimate that 95 percent of the lifecycle 
petroleum reductions resulting from the use of renewable fuel will be 
met through reductions in net petroleum imports. In Section IX of this 
preamble we estimate the value of the decrease in imported petroleum at 
about $3.5 billion in 2012 for the 7.5 billion gallon case and $5.8 
billion for the 9.6 billion gallon case, in comparison to our 2012 
reference case. Total petroleum import expenditures in 2012 are 
projected to be about $698 billion.
    The above numbers only assess those impacts of increased production 
and use of renewable fuel that we can quantify at this time. The RFS 
program attempts to spur the increased use of renewable transportation 
fuels made principally from agricultural crops produced in the U.S. As 
a result, it is important to analyze the consequences of the transition 
to greater renewable fuel use in the U.S. agricultural sector. To 
analyze the impacts on the U.S. agricultural sector, EPA has selected 
the Forest and Agricultural Sector Optimization Model (FASOM) developed 
by Professor Bruce McCarl, Texas A&M University and others over the 
past thirty years. FASOM is a dynamic, nonlinear programming model of 
the agriculture and forestry sectors of the U.S. (For this analysis, we 
will be focusing upon the agriculture portion of the model.) The 
strength of this model is its consideration of the full direct and 
indirect impacts of a shift in production of an agricultural commodity. 
For example, increased ethanol use will increase the demand for corn. 
The model assesses not only the impacts of increased demand for corn on 
acres devoted to corn production but also where the incremental corn 
will be produced, what other crops will be displaced and how corn is 
allocated among competing uses. Shifts in corn production will likely 
impact the price of corn and other crop prices. The model can also 
estimate the impacts of increased renewable fuel use on animal feed 
costs, animal production, costs to consumers and U.S. agricultural 
exports. Similarly, FASOM can estimate effects on U.S. farm employment 
and income (broken down by region, and farm sector such as corn farmers 
versus soybean producers versus the livestock industry, for example).

[[Page 55560]]

    One of the effects of increased use of renewable fuel is that it 
diversifies the energy sources used in making transportation fuel. To 
the extent that diverse sources of fuel energy reduce the dependence on 
any one source, the risks, both financial as well as strategic, of 
potential disruption in supply or spike in cost of a particular energy 
source is reduced. As part of the RFS rulemaking, EPA is estimating the 
energy security effects of reduced oil use due to the expanded use of 
renewable fuel. However, these analyses will not be available until the 
final rule.
4. Greenhouse Gases and Fossil Fuel Consumption
    There has been considerable interest in the impacts of fuel 
programs on greenhouse gases and fossil fuel consumption. Therefore, in 
this proposed rulemaking we have undertaken an analysis of the 
greenhouse gas and fossil fuel consumption impacts of a transition to 
greater renewable fuel use. This is the first analysis of its kind in a 
major rule, and as such it may guide future work in this area.
    As a result of the transition to greater renewable fuel use, some 
petroleum-based gasoline and diesel will be directly replaced by 
renewable fuels. Therefore, consumption of petroleum-based fuels will 
be lower than it would be if no renewable fuels were used in 
transportation vehicles. However, a true measure of the impact of 
greater use of renewable fuels on petroleum use, and indeed on the use 
of all fossil fuels, accounts not only for the direct use and 
combustion of the finished fuel in a vehicle or engine, but also 
includes the petroleum use associated with production and 
transportation of that fuel. For instance, fossil fuels are used in 
producing and transporting renewable feedstocks such as plants or 
animal byproducts, in converting the renewable feedstocks into 
renewable fuel, and in transporting and blending the renewable fuels 
for consumption as motor vehicle fuel. Likewise, fossil fuels are used 
in the production and transportation of petroleum and its finished 
products. In order to estimate the true impacts of increases in 
renewable fuel use on fossil fuel use, we must take these steps into 
account. Such analyses are termed lifecycle analyses.
    We compared the lifecycle impacts of renewable fuels to the 
petroleum-based gasoline and diesel fuels that they replace. This 
analysis allowed us to estimate not only the overall impacts of 
renewable fuel use on petroleum use, but also on emissions of 
greenhouse gases such as carbon dioxide from all fossil fuels. Based on 
a comparison to the 2004 base fuel, we estimated that the increased use 
of renewable fuels will reduce petroleum consumption by about 1.0 to 
1.6 percent in the transportation sector in 2012. This is equivalent to 
2.3-3.9 billion gallons of petroleum in 2012. We also estimated that 
greenhouse gases from the transportation sector will be reduced by 
about 0.4-0.6 percent, equivalent to about 9-14 million tons. These 
reductions are projected to continue to increase in the future as crude 
oil prices are expected to continue to provide the stimulus for greater 
use of renewable fuels beyond 2012. These greenhouse gas emission 
reductions are also dominated by the forecast that the majority of the 
future ethanol use will be produced from corn. If advances in 
cellulosic technology allow its use to exceed the levels assumed in our 
analysis, then even greater greenhouse gas reductions would result.\5\
---------------------------------------------------------------------------

    \5\ Cellulosic ethanol is estimated to provide a comparable 
petroleum displacement as corn derived ethanol on a per gallon 
basis, though the impacts on total energy and greenhouse gas 
emissions differ.
---------------------------------------------------------------------------

5. Potential Water Quality Impacts