Notice of Decision Regarding the State of Texas Request for a Waiver of a Portion of the Renewable Fuel Standard, 47168-47184 [E8-18738]

Agencies

• ENVIRONMENTAL PROTECTION AGENCY

[Federal Register Volume 73, Number 157 (Wednesday, August 13, 2008)]
[Notices]
[Pages 47168-47184]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-18738]


-----------------------------------------------------------------------

ENVIRONMENTAL PROTECTION AGENCY

[FRL-8703-5]


Notice of Decision Regarding the State of Texas Request for a 
Waiver of a Portion of the Renewable Fuel Standard

AGENCY: Environmental Protection Agency (EPA).

ACTION: Notice.

-----------------------------------------------------------------------

SUMMARY: The Governor of the State of Texas requested a waiver of 50 
percent of the renewable fuel standard (RFS or RFS mandate) for the 
time period from September 1, 2008 through August 31, 2009, pursuant to 
section 211(o)(7) of the Clean Air Act (the Act), 42 U.S.C. 7545(o)(7). 
Based on a thorough review of the record in this case, EPA finds that 
the evidence does not support a determination that implementation of 
the RFS mandate during the time period at issue would severely harm the 
economy of a State, a region, or the United States. EPA is therefore 
denying the request for a waiver. In this Notice EPA is also providing 
guidance on the Agency's general expectations for future waiver 
requests.

DATES: Petitions for review must be filed by October 14, 2008.

ADDRESSES: EPA has established a docket for this action under Docket ID 
No. EPA-HQ-OAR-2008-0380. All documents and public comment in the 
docket are listed on the www.regulations.gov Web site. Publicly 
available docket materials are available either electronically through 
www.regulations.gov or in hard copy at the Air and Radiation Docket in 
EPA Headquarters Library, EPA West Building, Room 3334, 1301 
Constitution Ave., NW., Washington, DC. The Public Reading Room is open 
from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal 
holidays. The telephone number for the Reading Room is (202) 566-1744. 
The Air and Radiation Docket and Information Center's Web site is 
https://www.epa.gov/oar/docket.html. The electronic mail (e-mail) 
address for the Air and Radiation Docket is: a-and-r-Docket@epa.gov, 
the telephone number is (202) 566-1742, and the Fax number is (202) 
566-9744.

FOR FURTHER INFORMATION CONTACT: James W. Caldwell, Office of 
Transportation and Air Quality, Mailcode: 6406J, Environmental 
Protection Agency, 1200 Pennsylvania Ave., NW., Washington, DC 20460; 
telephone number: (202) 343-2802; e-mail address: Caldwell.jim@epa.gov.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

    The RFS program, which requires the use of renewable fuels in the 
U.S. transportation sector, was originally adopted by Congress in the 
Energy Policy Act of 2005 (EPAct). This program was recently modified 
by Congress in the Energy Independence and Security Act of 2007 (EISA). 
The RFS program provides that the Administrator, in consultation with 
the Secretaries of Agriculture and Energy, may waive the national 
renewable fuel volume requirements, in whole or in part, if the 
Administrator determines that implementation of the requirement would 
severely harm the economy or environment of a State, region, or the 
United States (see Clean Air Act section 211(o)(7)(A)).
    On April 25, 2008, the Governor of the State of Texas requested a 
fifty percent waiver of the national volume requirements for the 
renewable fuel standard (RFS or RFS mandate). Texas

[[Page 47169]]

based its request on the assertion that the RFS mandate is 
unnecessarily having a negative impact on the economy of Texas, 
specifically that increased ethanol production is contributing to 
increased corn prices which are negatively affecting its livestock 
industry and food prices. EPA published in the Federal Register a 
notice of receipt of this request and invited public comment on all 
issues relevant to making a decision on Texas's request.
    After considering all of the public comments, and consulting with 
the Secretaries of Agriculture and Energy, EPA has determined that the 
waiver request should be denied. In making this decision, EPA has 
interpreted the statutory provisions to require: a determination based 
on the expected impact of the RFS program itself, a generally high 
degree of confidence that implementation of the RFS program would 
severely harm the economy of a State, region, or the United States, and 
a high threshold for the nature and degree of harm by requiring a 
determination of severe harm. EPA and almost all commenters recognize 
that there are many factors that affect the use of biofuels in the U.S. 
and the overall impact of such use. However, the RFS waiver provision 
calls for EPA to evaluate a much narrower set of issues, focusing on 
just the impact of the RFS mandate.
    With this framework in mind, EPA evaluated all of the evidence 
concerning the issues that are relevant under the waiver provision. In 
its supplemental comments, Texas requested that the waiver request 
focus on the 2008/2009 corn marketing year. EPA agrees that looking at 
the impact with and without a waiver over this time frame is an 
important way to identify the impact of implementation of the RFS 
program. Several commenters submitted modeling analyses that looked at 
the impact of a waiver of the RFS mandate on ethanol production, corn 
prices, fuel prices, and other related impacts. In addition to 
evaluating the information submitted by Texas and other commenters, the 
Agency conducted its own analysis. In consultation with the United 
States Department of Agriculture (USDA) and the United States 
Department of Energy (DOE), EPA reviewed several economic models and 
chose a model created by researchers at Iowa State University (ISU 
model) to analyze the impact of the RFS on corn, ethanol, and gasoline 
prices based on uncertainty in key variables such as crop yields and 
crude oil prices. As part of our analysis, EPA reviewed the underlying 
data and assumptions in the ISU model for their appropriateness. In 
this context, EPA believes the ISU modeling reflects the most recent 
data available, is well designed and documented, and provides a number 
of advantages over other approaches to analyzing the issues relevant 
for this decision. EPA also considered current market conditions 
influencing the production of ethanol in the U.S. such as high oil 
prices and the large existing production capacity of the U.S. ethanol 
industry, as well as other empirical data including historical and 
current Renewable Identification Number (RIN) credit prices.
    First, after weighing all of the evidence before it, EPA determined 
that the evidence does not support a finding that implementation of the 
RFS ``would'' harm the economy of a State, region, or the United 
States, because the evidence does not reach the generally high degree 
of confidence required for issuance of a waiver under CAA section 
211(o)(7)(A). On this issue, EPA believes that this body of information 
supports the determination that the most likely result is that the RFS 
would have no impact on ethanol production volumes in the relevant time 
frame, and therefore no impact on corn, food, or fuel prices.\1\
---------------------------------------------------------------------------

    \1\ As discussed later, EPA believes that this body of 
information also supports, the determination that implementation of 
the RFS would have no significant impact in the relevant time frame.
---------------------------------------------------------------------------

    Second, on the issue of the severity of any harm, the weight of all 
of the evidence also indicates that were the RFS mandate to have an 
impact on the economy during the 2008/2009 corn marketing year, it 
would not be of a nature or magnitude that could be characterized as 
severe. Even in the modeled scenarios where a waiver of the RFS mandate 
might reduce the production of ethanol, the resulting decrease in corn 
prices is anticipated to be small (on average $0.30 per bushel of 
corn), and there would be an accompanying small increase in the price 
of fuel (on average $0.01 per gallon in fuel costs). Such levels of 
potential impacts from the RFS program do not satisfy the high 
threshold of harm to the economy to be considered severe. We also 
conducted a sensitivity analysis on a low probability scenario with 
larger potential impacts, the results of which are presented below.
    EPA also received comment on several issues not associated with the 
economic impacts of RFS. These include comments on the general economic 
and environmental impacts of the recent increase in biofuels, and the 
effect of the use of biofuels on commodity markets. EPA recognizes that 
Texas and many parties, both those supporting the waiver and those 
opposing the waiver, have raised issues of great concern to them and to 
others in the nation concerning the role of biofuels in our country. 
However, the issue before the Agency in this case is much more limited, 
as described below in our discussion of EPA's authority under section 
211(o)(7)(A) of the Act. Based on a thorough review of the record in 
this case and by applying the evidence to the statutory criteria, EPA 
finds that the evidence does not support making a determination that 
implementation of the mandate would severely harm the economy of a 
State, region, or the United States.
    This decision on the Texas waiver request is based on current 
circumstances and market conditions. However, we recognize that 
significant changes could occur in the future with respect to the 
multiple factors related to the production and use of renewable fuels 
in the U.S. transportation sector. EPA is committed to monitoring the 
implementation of the renewable fuels program and its impact on the 
economy and environment.
    This is the first RFS waiver request to be submitted to EPA and 
many important issues were raised and discussed in the public comment 
process. In addition to announcing and explaining EPA's decision on the 
Texas waiver request, in this Notice the Agency is also providing 
guidance to interested parties on its expectations concerning future 
requests for a waiver.

II. Overview of RFS Program

    The Energy Policy Act of 2005 (EPAct) amended the Clean Air Act to 
establish a Renewable Fuel Standard (RFS) Program and gave EPA 
responsibility for implementing it. EPAct required EPA to issue 
regulations ensuring that gasoline sold in the U.S., on an annual 
average basis, contained a specified volume of ``renewable fuel.'' The 
mandate schedule began at 4.0 billion gallons of renewable fuel in 
2006, and increased to 4.7 in 2007, 5.4 in 2008, 6.1 in 2009, 6.8 in 
2010, 7.4 in 2011, and 7.5 billion gallons in 2012. The Energy 
Independence and Security Act of 2007 (EISA) amended the RFS program by 
extending the years in which Congress specified the required volume of 
renewable fuels by ten years, increasing the required volumes for the 
renewable fuel mandate, and adding new, separate mandates starting in 
2009 for advanced biofuels, including cellulosic biofuel and biomass-
based diesel. EPAct set the 2007 mandate for renewable fuel at 4.7 
billion gallons and the 2008 mandate at 5.4 billion gallons.

[[Page 47170]]

EISA increases the 2008 and 2009 RFS renewable fuel mandates to 9.0 
billion and 11.1 billion gallons. EISA also imposed additional 
requirements for the use of advanced biofuel and biomass-based diesel 
in 2009, included within the overall mandate for 11.1 billion gallons 
of renewable fuel in 2009.\2\ EPAct had the statutory goal of 
increasing the volume of renewable fuels that are required to be used 
in the transportation sector and Congress furthered that goal with the 
passage of EISA. In this context, implementation of EISA is aimed at 
reducing dependence on foreign sources of energy, increasing the 
domestic supply of energy, and diversifying the nation's energy 
portfolio by requiring the transition from petroleum-based fuels to 
bio-based alternatives in the transportation sector. In addition, as 
part of EISA, Congress is requiring EPA to perform a life-cycle 
analysis of emissions of greenhouse gases associated with the full 
lifecycle of renewable fuels, and is requiring a minimum level of 
greenhouse gas reduction to qualify for advanced biofuel, cellullosic 
biofuel and biomass-based diesel. This will be further discussed in 
EPA's upcoming second phase renewable fuel standard rulemaking (RFS2), 
which will implement the renewable fuels provisions of EISA.
---------------------------------------------------------------------------

    \2\ A more detailed discussion of the requirements for different 
types of biofuels is included in Section V.
---------------------------------------------------------------------------

III. EPA's Administrative Process

    On April 25, 2008, the Governor of Texas submitted a request to the 
Administrator under section 211(o)(7) of the Act for a waiver of 50 
percent of the RFS ``mandate for the production of ethanol derived from 
grain.'' The request claims that the mandate is unnecessarily having a 
negative impact on the economy of Texas and driving up global food 
prices. In its request Texas specifically identified increased corn 
prices as having a negative effect on its livestock industry and that a 
waiver would also provide needed relief to consumers at the grocery 
store. This initial request did not include substantive supporting data 
or analyses.\3\
---------------------------------------------------------------------------

    \3\ Texas subsequently submitted comments during the public 
comment period, including a recent briefing paper from the 
Agriculture and Food Policy Center at the Texas A&M University along 
with an economic analysis on the implications of a RFS waiver on the 
price of corn and impacts on the livestock industry as well as 
impacts on the petroleum markets and the broader economy. Texas also 
clarified that it was asking for a ``50-percent reduction in the 
corn-derived, volumetric ethanol mandates, * * * effectively 
requesting that EPA, for the foreseeable future, return the RFS 
system to the status quo prior to enactment of EISA i.e., to the 
much more moderate trajectory that prevailed under the Energy Policy 
Act of 2005.'' Texas states its preference that this be accomplished 
through a waiver that corresponds to the 2008-2009 crop year (i.e., 
September 1, 2008 through August 31, 2009). The initial Texas waiver 
request of April 25, 2008 (Texas waiver request) can be found at 
EPA-HQ-OAR-2008-0380-0058. The Texas supplemental comments of June 
23, 2008 (Texas supplemental comments) can be found at EPA-HQ-OAR-
2008-0380-0526. In addition, Texas submitted additional comments 
after the close of the comment period, on August 6, 2008. These 
comments can be found at EPA-HQ-OAR-2008-0380. Given the date on 
which the additional comments were received, EPA's response to them 
can be found in a Memorandum to the Docket dated August 7, 2008.
---------------------------------------------------------------------------

    On May 22, 2008, EPA published a notice requesting comment on the 
petition submitted by Texas as well as any matter that might be 
relevant to EPA's action on the petition, specifically including (but 
not limited to) information that would enable EPA to: (a) Evaluate 
whether compliance with the RFS is causing severe harm to the economy 
of the State of Texas; (b) evaluate whether the relief requested will 
remedy the harm; (c) determine to what extent, if any, a waiver 
approval would change demand for ethanol and affect corn or feed 
prices; and (d) determine the date on which a waiver should commence 
and end if it were granted.\4\ As stated in EPA's notice for comment, 
granting a waiver would reduce the national volume requirements under 
section 211(o)(2) of the Act, which would have effects in areas of the 
country other than Texas. Therefore, EPA invited comment on all issues 
relevant to whether and how the Administrator might exercise his 
discretion under this waiver provision of the Act, including but not 
limited to the impact of a waiver on other regions or parts of the 
economy, on the environment, on the goals of the renewable fuel 
program, on appropriate mechanisms to implement a waiver if a waiver 
were determined to be appropriate, and any other matters considered 
relevant.
---------------------------------------------------------------------------

    \4\ 73 FR 29753.
---------------------------------------------------------------------------

    EPA's public comment period closed on June 23, 2008. EPA received 
in excess of 15,000 comments during the comment period; the majority of 
the comments were short statements generally in support of the Texas 
request. EPA also received numerous comments from various trade 
organizations and businesses, Governors and other elected officials, 
and environmental organizations supporting or opposing the waiver, many 
of which included references to various studies and reports which are 
addressed below.

IV. Key Interpretive Issues

    As noted above, Section 211(o)(7) of the CAA provides, in part, 
that EPA ``may waive the [mandated national RFS volume requirements] in 
whole or in part on petition by one or more States * * * (i) based on a 
determination by the Administrator * * * that implementation of the 
requirement would severely harm the economy or environment of a State, 
a region, or the United States, or (ii) based on a determination by the 
Administrator * * * that there is an inadequate domestic supply.''
    This is the first EPA action in response to a petition under this 
provision, and as a result EPA is addressing a number of questions 
regarding the scope of this authority. This section discusses EPA's 
position on the meaning of various key parts of this provision, 
including EPA's views on the interpretations advanced by Texas and 
other commenters. Because Texas argues that a waiver is justified under 
the claim that ``implementation of the RFS program would severely harm 
the economy * * * of a State, a region or the United States,'' we have 
focused our review on this provision.

1. Implementation of the RFS Itself Must Severely Harm the Economy

    The statute authorizes a waiver where ``implementation of the 
requirement would severely harm the economy.'' Texas and several 
commenters argue that high corn prices are causing severe harm to the 
Texas and U.S. livestock industry as well as to low-income individuals 
faced with increasing food costs. They acknowledge that high corn 
prices are caused by a number of factors, but argue that the RFS 
program is one of the factors leading to these high prices, that it is 
a significant or material factor, and that this kind of impact from the 
RFS program is sufficient to justify a waiver of the RFS 
requirements.\5\ Texas recognizes that the waiver provision ``speaks in 
terms of a singular causal link between the mandate and the harm (i.e. 
`implementation of the requirement would severely harm')'', but that 
``Congress could not have intended to predicate a waiver on such a link 
because such a situation is never found in the real world. In the 
context of an economy at the scale of a state, region or nation, 
outcomes are determined by multiple factors. Congress must have meant 
to pivot a waiver on whether the mandates would

[[Page 47171]]

contribute significantly to causing severe harm, as part of a mix of 
forces.'' \6\
---------------------------------------------------------------------------

    \5\ See Texas supplemental comments, National Cattlemen's Beef 
Association at EPA-HQ-OAR-2008-0380-0418 at 1, and Texas Cattle 
Feeders Association at EPA-HQ-OAR-2008-0380 at 1.
    \6\ Texas supplemental comments at 14.
---------------------------------------------------------------------------

    We do not agree with the interpretation Texas offers. The statute 
provides that a waiver of the program is authorized where 
``implementation of the program would severely harm the economy * * *'' 
As recognized by Texas, the straightforward meaning of this provision 
is that implementation of the RFS program itself must be the cause of 
the severe harm.\7\ Texas would instead treat the waiver provision as 
if Congress had authorized a waiver where implementation of the program 
would significantly contribute to severe harm. The provision adopted by 
Congress does not support the interpretation by Texas.
---------------------------------------------------------------------------

    \7\ Texas supplemental comments at 14.
---------------------------------------------------------------------------

    There are numerous examples in section 211 and other sections of 
the Clean Air Act where Congress authorized EPA action based on the 
contribution made by a factor or activity, and worded the statute to 
clearly indicate this intention. For example, section 211(c)(1) of the 
Act authorizes EPA to control or prohibit a fuel or fuel additive where 
it ``causes or contributes'' to air or water pollution that may 
reasonably be anticipated to endanger public health or welfare.\8\ 
There are also various waiver provisions where Congress clearly used 
language indicating that a waiver could be based on a determination 
that there is a contribution to an adverse result or a similar lesser 
degree of casual link to the adverse result. Section 211(f)(4), for 
example, allows EPA to waive a certain prohibition on fuels and fuel 
additives upon a determination that they will not ``cause or 
contribute'' to a specified harm. Likewise section 211(h)(5)(A) allows 
EPA to remove a federal Reid vapor pressure (RVP) waiver if a state has 
supporting documentation to show that the RVP waiver will increase 
emissions that ``contribute to air pollution.'' Under section 
211(m)(3)(A), EPA may waive the requirement for a wintertime oxygenated 
gasoline program where a State demonstrates that mobile sources ``do 
not contribute significantly'' to carbon monoxide levels in the area. 
Similar language was used by Congress when it referred to lesser 
degrees of adverse impact on attainment, such as the provision for a 
waiver of the oxygenated gasoline requirement for reformulated gasoline 
under section 211(k)(2)(B) (``prevent or interfere with * * * 
attainment'') \9\ and section 211(m)(3)(A) (``prevent or interfere with 
* * * attainment''). However Congress did not use such language in this 
waiver provision, and the omission of any reference to contribution or 
similar terms in section 211(o)(7)(A) indicates Congressional intent to 
limit the availability of a waiver to situations where implementation 
of the RFS program itself would severely harm the economy.\10\
---------------------------------------------------------------------------

    \8\ Also see section 202(a)(1) (``cause or contribute''); 
section 213(a)(3), (4) (``cause or contribute'' and ``significant 
contributor''); and section 231(a)(2) (``cause or contribute'').
    \9\ This provision of the Clean Air Act was deleted by the 
Energy Policy Act of 2005, ending the requirement that reformulated 
gasoline (RFG) contain 2% oxygen content by weight. During the time 
that the statutory provision was in effect, EPA considered and 
responded to requests to waive the 2% mandate. See Davis v. EPA, 348 
F.3d 772 (9th Cir. 2003).
    \10\ Even the sentence structure used by Congress indicates that 
the harm is to come from the RFS mandate itself. Adding the idea of 
significant contribution would call for changing the way ``harm'' is 
used from a verb (would * * * harm) to a noun (would contribute 
significantly to harm), and changing the kind of harm from the 
adverb severely to the adjective severe. Congress however did not 
write it that way.
---------------------------------------------------------------------------

    Texas essentially asks EPA to interpret this provision as if it was 
written to authorize a waiver where implementation of the RFS program 
would ``significantly contribute'' to severely harming the economy. 
However, Texas offers no explanation of why a ``significant'' 
contribution would justify such action, as opposed to some other level 
of contribution such as a non-de minimis, marginal, moderate, or some 
much more substantial contribution. In addition, Texas argues that this 
is called for because it would otherwise be impossible to ever 
demonstrate that the criteria of a waiver have been met and Congress 
could not have intended this result. Texas asserts this conclusion of 
impossibility, but fails to even attempt to show that this is the case.
    Even if the statute was less clear on its face EPA would still 
reject the approach suggested by Texas. Many circumstances other than 
RFS could lead to impacts on an economic factor such as increased corn 
prices. Other circumstances could be the substantial or the overriding 
contributor to such an economic factor. Under Texas' interpretation, a 
waiver could be authorized where implementation of the RFS contributed 
in any significant manner to such a situation, as long as the economic 
factor, overall, was causing severe harm. This approach could apply 
even if the economic harm was based on this economic factor in 
combination with another economic factor or factors. The degree of harm 
actually attributable to implementation of the RFS would not matter. As 
long as the RFS would have some significant effect on some economic 
factor or combination of factors that was causing severe harm from an 
overall perspective, then the degree of harm actually attributable to 
the RFS would be irrelevant to EPA's authority to issue a waiver. Given 
the logic of Texas' approach and recognizing the many varied and 
complex interrelationships in our modern economy, Texas' interpretation 
would amount to a very open-ended and wide ranging waiver provision; 
EPA does not believe this is what Congress intended. EPA believes that 
rejecting Texas' approach, and implementing a more limited waiver 
provision that requires a showing that the RFS program itself would 
severely harm the economy of a State, region or the U.S., will better 
implement Congress' overall desire to promote the use of renewable 
fuels, reflected in enacting the expanded RFS program and mandating the 
increased utilization of renewable fuels over a number of years.\11\
---------------------------------------------------------------------------

    \11\ Indeed, Congress provided for a 9 year schedule in EPAct 
and a 14 year schedule in EISA, specifying the total amounts of 
renewable fuel that would be required during those years. Under both 
EPAct and EISA the required level of the RFS is to increase in each 
year after the end of the statutory schedule. EPA is to set the 
required level based on consideration of various statutory factors, 
with Congress specifying a minimum level of growth in the RFS each 
year.
---------------------------------------------------------------------------

2. There Must Be a Generally High Degree of Confidence That There Will 
Be Severe Harm as a Result of the Implementation of RFS

    The waiver provision indicates that EPA must find that 
implementation of the RFS ``would'' harm the economy. We interpret this 
as indicating that there must be a generally high degree of confidence 
that severe harm would occur from implementation of the RFS. Congress 
specifically provided for a lesser degree of confidence in a related 
waiver provision, section 211(o)(8). That provision applies for just 
the first year of the RFS program, and provides for a waiver of the 
2006 mandate based on a study by the Secretary of Energy of whether the 
program ``will likely result in significant adverse impacts on 
consumers in 2006.'' (Emphasis supplied). The term ``likely'' generally 
means that something is at least probable, and EPA believes that the 
term ``would'' in section 211(o)(7)(A) means Congress intended to 
require a greater degree of confidence under the waiver provision at 
issue here.
    EPA believes that generally requiring a high degree of confidence 
that implementation of the RFS would

[[Page 47172]]

severely harm an economy would appropriately implement Congress' intent 
for yearly growth in the use of renewable fuels, evidenced by the 2005 
and 2007 mandates for such growth. In addition, it would limit waivers 
to circumstances where a waiver would be expected to provide effective 
relief from harm. If there is generally high confidence that 
implementation of the mandate would cause harm, then a waiver should 
provide effective relief from that harm. However in situations where 
there is not such a high degree of confidence, a waiver might disrupt 
the expected growth in use of renewable fuels but there would be no 
clear expectation that a waiver would provide a benefit by reducing any 
harm. As discussed below, EPA does not need to interpret this provision 
in any greater detail for purposes of acting on Texas' petition, as the 
circumstances in this case clearly do not demonstrate the required 
degree of confidence that severe harm would occur.
    Support for EPA's interpretation of this waiver provision is found 
in an analogous approach taken by EPA in applying former section 
211(k)(2)(B), the provision for waiver of the oxygen content 
requirement for RFG. In that provision, Congress provided that EPA 
``may'' waive the oxygen content requirement upon a determination that 
compliance with this requirement ``would'' prevent or interfere with 
attainment of a NAAQS. EPA interpreted this as calling for the waiver 
applicant to ``clearly demonstrate'' interference before a waiver would 
be granted. This interpretation was upheld in Davis v. EPA, 348 F.3d 
772, 779-780 (9th Cir. 2003).

3. ``Severely Harm'' Indicates That Congress Set a High Threshold for 
Grant of a Waiver

    While the statute does not define the term ``severely harm,'' the 
straightforward meaning of this phrase indicates that Congress set a 
high threshold for issuance of a waiver. This is also indicated by the 
difference between the criteria for a waiver under section 211(o)(7)(A) 
and the criteria for a waiver during the first year of the RFS program. 
In section 211(o)(8)(A) Congress provided for a waiver based on an 
assessment of whether implementation of the RFS in 2006 would result in 
``significant adverse impacts'' on consumers. A waiver under section 
211(o)(7)(A), however, requires that implementation ``severely harm'' 
the economy, which is clearly a much higher threshold than 
``significant adverse impacts.'' It is also instructive to consider the 
use of the term ``severe'' in CAA section 181(a). Ozone nonattainment 
areas are classified according to their degree of impairment, along a 
continuum of marginal, moderate, serious, severe or extreme ozone 
nonattainment areas. Thus, in section 181, ``severe'' indicates a level 
of harm that is greater than marginal, moderate, or serious, though 
less than extreme. We believe that the term ``severe'' should be 
similarly interpreted for purposes of section 211(o)(7)(A), as 
indicating a point that is quite far along a continuum of harm, though 
short of extreme. EPA does not need to interpret this provision in any 
greater detail for purposes of acting on Texas' petition, as the 
circumstances in this case clearly do not demonstrate the kind of harm 
that would be characterized as severe.

4. Harm to the Economy

    EPA must also consider the meaning of the term ``economy'' in 
section 211(o)(7)(A)(2). Texas has argued that the term should be 
interpreted such that a showing of severe harm to one sector of the 
economy, e.g. the livestock industry, is sufficient under the statute. 
Others argue that there must be a showing of severe harm to the entire 
economy of a State, region or the United States, including all 
sectors.\12\ EPA believes that it would be unreasonable to base a 
waiver determination solely on consideration of impacts of the RFS 
program to one sector of an economy, without also considering the 
impacts of the RFS program on other sectors of the economy or on other 
kinds of impact. It is possible that one sector of the economy could be 
severely harmed, and another greatly benefited from the RFS program; or 
the sector that is harmed may make up a quite small part of the overall 
economy. Based on the waiver request received and, where appropriate, 
public comments, EPA should responsibly review and analyze the economic 
information that is reasonably available regarding the full impacts of 
the RFS program and a possible waiver, including detrimental and 
beneficial impacts, before determining that a waiver of the program is 
warranted.\13\
---------------------------------------------------------------------------

    \12\ Commenters include the Renewable Fuels Association (EPA-HQ-
OAR-2008-0380-0479 at 1) and American Coalition for Ethanol (EPA-HQ-
OAR-2008-0380-0454 at 1-2).
    \13\ This is of course limited by the 90 day time frame called 
for in the waiver provision.
---------------------------------------------------------------------------

    The statute provides that EPA ``may'' waive the RFS volume 
requirement after finding that implementation of the RFS program would 
severely harm the economy. Therefore, a broad consideration of economic 
and other impacts could be undertaken whether or not EPA adopted Texas' 
more limited interpretation of the term ``economy.'' For example, if 
EPA rejected Texas' interpretation, EPA would determine whether RFS 
implementation would severely harm the overall economy of a State, 
region, or the U.S. However, if EPA adopted Texas' interpretation, and 
then found severe harm to a sector of the economy, EPA would still 
evaluate the overall impacts on the economy and other factors before 
exercising its discretion under the ``may'' clause to grant or deny the 
waiver request. EPA does not need to resolve this issue of 
interpretation in this specific waiver decision. As discussed below the 
circumstances here do not warrant a waiver under either interpretation.

5. EPA Has Broad Discretion in Determining Whether To Grant a Waiver 
Even If Implementation Would Severely Harm the Economy

    As noted above, Congress stated that EPA ``may'' grant a waiver if 
certain criteria are met, and the term ``may'' typically denotes 
discretionary action. Where Congress intends non-discretionary action, 
it typically employs a term like ``shall.'' Thus, EPA believes Congress 
intentionally gave EPA discretion in determining whether to grant or 
deny a waiver request, even in instances where EPA finds that 
implementation of the program would severely harm the economy or 
environment of a State, region or the United States, or where there is 
inadequate domestic supply. As noted above, this interpretation allows 
EPA to look broadly at all of the impacts of implementation of the 
program, and all of the impacts of a waiver, and does not limit EPA to 
looking only at impacts to the economy, a sector of the economy, the 
environment, or domestic supply. The relief requested by a waiver 
applicant will always, under this provision, be national in character, 
hence we expect that EPA will always want to examine the nationwide 
effects of the requested relief, and give appropriate weight to the 
range of anticipated effects. This interpretation allows EPA to weigh 
all of the impacts before deciding to grant or deny a waiver of the 
statutory requirements designed to require the expanded use of 
renewable fuels.

V. Technical Analysis of RFS Mandate

    In this section, we first examine the likelihood that 
implementation of the RFS will impact the amount of ethanol produced 
and consumed over the 2008/2009 corn marketing year (September 1, 2008 
through August 31, 2009), and thereby impact factors such as the price

[[Page 47173]]

of corn during that time period.\14\ Second, we evaluate the impacts 
and potential degree of harm from implementation of the RFS on key food 
and fuel parameters, such as U.S. corn prices, livestock feed costs, 
and fuel prices. As part of this section, we will discuss various 
comments and our response to them as appropriate.
---------------------------------------------------------------------------

    \14\ We use the corn marketing year partially because it is the 
time period over which Governor Perry requested the waiver, and 
partially because it is the time period over which it is most 
straightforward to estimate the impact on corn prices due to a 
change in ethanol demand.
---------------------------------------------------------------------------

1. Likelihood of Impact of Implementation of the Renewable Fuels 
Standard

    To analyze the impact of implementation of the RFS, EPA evaluated 
the impact of a waiver of the standard. This comparison of 
circumstances with and without a waiver identifies the impact properly 
associated with implementation of the RFS program for the 2008/2009 
marketing year. To make this comparison, the EPA first determined the 
most appropriate economic modeling tool to employ for this purpose. EPA 
evaluated several models, including the model developed by researchers 
at Texas A&M University (TAMU model) \15\ and the model used by Dr. 
Elam of FarmEcon, LLC.\16\ We chose a model developed by researchers at 
Iowa State University (ISU model) for a number of reasons. First, we 
felt it was critical to use a stochastic model to capture a range of 
potential outcomes, rather than a point estimate, given potential 
variation in a number of critical variables associated with ethanol 
production. Second, the ISU model captures the interaction between the 
agriculture markets and the energy markets, and is able to look at 
uncertainty in variables in both sectors. Given the volatility in both 
crude oil and corn prices over the last few years, the ability of the 
ISU model to account for this variability gives the model an advantage 
over other models that are locked into a single projected crude oil 
price or corn crop estimate. Third, while the model has not gone 
through formal peer review, the documentation is straightforward and 
transparent, and allows all interested parties to understand the 
assumptions that drive the results. Finally, the ISU model was designed 
to be constantly and quickly updated with the most recently available 
data, such as the World Agricultural Supply and Demand Estimate (WASDE) 
reports.\17\ This design feature allows the model to be policy 
relevant, given the fact that a model is only as reliable as the data 
contained within it.
---------------------------------------------------------------------------

    \15\ The March TAMU modeling results were referenced in Texas' 
initial waiver request and cited by several commenters (EPA-HQ-OAR-
2008-0380-0058). A June update to the March report was provided in 
Texas' supplemental comments (EPA-HQ-OAR-2008-0380-0526).
    \16\ Several commenters cited the March report by Dr. Elam (EPA-
HQ-OAR-2008-0380-0574). The Balanced Food and Fuel Coalition also 
submitted a June version of the report (EPA-HQ-OAR-2008-0380-0465).
    \17\ The WASDE is USDA's forecast of supply and demand for major 
U.S. and international crops and livestock. The information can be 
found at https://www.usda.gov/oce/commodity/wasde/.
---------------------------------------------------------------------------

    The ISU model is a stochastic equilibrium model that attempts to 
capture the most probable prices of corn, ethanol and fuel given 
uncertainty in six variables: Corn acres planted, corn acres harvested, 
corn yields, U.S. corn export demand, crude oil prices, and the 
capacity of the U.S. corn ethanol industry. For each of the 
approximately 1000 simulated scenarios, the model picks a value for a 
factor like crude oil price by randomly selecting from a probability 
distribution curve \18\ for that factor.\19\ Since the probability of 
the specific value of a future crude oil price is built into the 
distribution curve for crude oil prices, the greater the probability of 
a certain crude oil price the more likely the model will pick that 
value for any scenario. The result is that the distribution of the 
results from the random draws fairly reflects the probability of the 
various uncertain variables. The central tendency of the random draws 
represents the most likely estimate of the future circumstances. The 
model is run with and without a waiver to determine the impact of a 
waiver. Details about the model are included in the June 2008 
paper,\20\ although for the results described below, several additional 
modifications have been made since June. At EPA's request, ISU 
researchers updated their model with the July 11, 2008 WASDE report. In 
addition, ISU researchers also modified the assumption that ethanol 
will have to be priced on an energy equivalent basis for volumes 
greater than 10 billion gallons.\21\ As described in the June paper, 
the ISU model had previously assumed ethanol must be priced on an 
energy equivalent basis for volumes over 7.7 billion gallons of 
ethanol. Additional details on the model changes are included in the 
docket.\22\
---------------------------------------------------------------------------

    \18\ The distribution curves for the stochastic variables are 
based on historical information, where available. Where reliable 
data is not available, simplifying assumptions are used. Details are 
included in the June 2008 paper (EPA-HQ-OAR-2008-0380-0548).
    \19\ The model also accounts for the impact of the blenders' tax 
credit and the tariff on imported ethanol. In the scenarios that 
were modeled these factors did not change, hence their impact on 
demand for ethanol did not change with and without a waiver of the 
RFS.
    \20\ EPA-HQ-OAR-2008-0380-0548.
    \21\ Despite the fact that ethanol contains only 2/3 the energy 
value of gasoline, it has historically and continues to be priced to 
retail consumers the same as if it is gasoline when it is sold in a 
gasoline blend with up to 10 volume percent ethanol (E10). Consumers 
are not able to detect the small decrease in fuel economy that 
results from a 10 percent blend, therefore ethanol can be priced 
based on its volume, not on its energy equivalent basis with 
gasoline. The wholesale price for ethanol has likewise followed the 
price of gasoline, on average being priced over time roughly 8 c/gal 
less than that of gasoline, reflecting its octane value, other 
blending costs, and distribution costs. In the last year or so, as 
ethanol use has continued to increase, the wholesale price of 
ethanol has begun to separate slightly more from that of gasoline 
as: (1) The octane value has declined, (2) the distribution costs 
have increased to get ethanol to more distant markets, (3) gasoline 
prices have increased, and (4) ethanol is having to compete in 
markets where gasoline is priced lower than in past ethanol markets. 
In recent months, the wholesale price of ethanol may also have been 
influenced by some temporary limitations in terminal blending 
capabilities to blend all the ethanol being produced. In the long 
term, as ethanol volumes increase above about 15 billion gallons, 
ethanol will saturate the gasoline market as an E10 blend and 
additional volumes of ethanol will have to be consumed in the form 
of E85 (a fuel that consists of up to 85 volume percent ethanol). 
When sold as E85, consumers will recognize a reduction in their 
mileage as compared to the use of an E10 blend due to the reduced 
energy content of ethanol. Therefore, retail pricing would be 
expected to take this fuel economy impact into account and wholesale 
prices for ethanol will have to be below that of gasoline to reflect 
its lower energy content. While this change in valuation will not 
occur until we reach about 15 billion gallons of ethanol, for our 
analysis we have conservatively assumed that this change in 
valuation will occur at 10 billion gallons to reflect potential 
short term limitations in the distribution system. If we had used 15 
billion gallons as the point at which ethanol must be priced on an 
energy equivalent basis, the likelihood that the mandate would be 
binding would be lower and the magnitude of the impacts smaller in 
the scenarios where the mandate was binding.
    \22\ See Memorandum to Docket, entitled ``Iowa State University 
Modeling Results.''
---------------------------------------------------------------------------

    As a result of these updates, the ISU model projects the average 
expected amount of ethanol demanded in the United States during the 
2008/2009 corn crop year without a waiver will be 11.05 billion 
gallons, which consists of approximately 10.67 billion gallons of 
domestic production and 380 million gallons (MG) of imports. ISU's 
model predicts that for 76 percent of the simulated scenarios, waiving 
the RFS mandate would not change the overall level of corn ethanol 
production or overall U.S. ethanol consumption in 2008/2009 because 
more ethanol would be demanded than the RFS requires. For those 76 
percent of the scenarios, waiving the RFS mandate would therefore have 
no impact on ethanol

[[Page 47174]]

use, corn prices, ethanol prices, or fuel prices. We refer to that 
model result as a 76 percent probability that the RFS will not be 
``binding'' in the 2008/2009 marketing year. Conversely, in 24 percent 
of the simulated ISU model runs the RFS would be binding. In this case, 
binding means that in 24 percent of the random draws of potential corn 
production, crude oil prices, and corn demand, the resulting market 
demand for ethanol would be below the RFS mandate and, therefore, the 
RFS would require greater use of ethanol than the market would 
otherwise demand. The binding scenarios are generally those in which 
crude oil prices and corn production are relatively low. In those 
cases, the RFS would have an impact on ethanol use and the food and 
fuel markets in the United States.
    For the primary analysis, the ISU model assumes corn ethanol would 
account for ten billion gallons of the RFS mandate during the 2008/2009 
corn crop year. Because the corn crop year is split over two RFS 
compliance years, the 10 billion gallons is based on the fraction of 
the corn crop year that would occur in the 2008 compliance year (one-
third) and the 2009 compliance year (two-thirds). EISA requires 9 
billion gallons of renewable fuels in 2008 and 11.1 billion gallons in 
2009; however, 600 million gallons of the 2009 volume must be advanced 
biofuels (including 500 million gallons of biomass-based biofuels). 
This advanced biofuel volume is not included in the calculation of the 
2008/2009 marketing year mandate, since the ISU model does not include 
cellulosic or biodiesel renewable fuels.\23\ As a sensitivity analysis, 
ISU researchers also evaluated different scenarios in which some of the 
2008/2009 mandate was also met with additional biodiesel production and 
renewable identification number (RIN) credits earned from excess 
ethanol production in the 2007 and 2008 compliance years.\24\ Both of 
these changes essentially make the RFS mandate less binding. We also 
conducted a sensitivity analysis that used a distribution curve for 
crude oil prices based on a mean crude oil price of $146/barrel. For 
that model run, the probability that the mandate would be binding 
decreased to 12%. Clearly, this assumption makes a difference in the 
modeling results. We believe the $125/barrel mean crude oil price 
scenario incorporates the best information available at this time, but 
we recognize that conditions may change in the future. For purposes of 
simplicity, only the results of the primary analysis using $125/barrel 
mean crude oil ISU scenario are presented in this document. However, 
the results from the full range of scenarios are included in the 
docket.\25\
---------------------------------------------------------------------------

    \23\ Although Iowa State analyzed the impact of waiving 100% of 
the mandate, the model predicted no difference between waiving 100% 
of the mandate and 50% of the mandate, as the amount of ethanol 
demanded under all the scenarios without the mandate was more than 
five billion gallons of ethanol (50% of the mandate).
    \24\ RINs are generated by producers of renewable fuels, and are 
used by refiners and importers to show compliance with the RFS. 
Excess RINs may be used as credits for the year following their 
generation, e.g., 2007 RINs may be used to show compliance with the 
2008 RFS standard, and 2008 RINs may be used to show compliance with 
the 2009 RFS standard.
    \25\ See Memorandum to Docket entitled, ``Iowa State University 
Modeling Results.''
---------------------------------------------------------------------------

    We believe the results provided by the ISU model are more robust 
than Elam's and TAMU's estimates for a number of reasons. Many of the 
assumptions used by Elam's model do not appear to accurately reflect 
market forces. According to Elam's March paper,\26\ U.S. gasoline and 
diesel prices impact the prices of corn and soybeans, but do not 
influence the demand for biofuels. In other words, the agricultural 
sector portion of the model does not appear to be directly linked to a 
fuel market module. Since higher crude oil prices are one of the major 
reasons for the increase in biofuel production, we believe this 
assumption is a major short coming of the model. Furthermore, the model 
used by Elam appears to value ethanol on an energy equivalent 
basis.\27\ We believe that ethanol will continue to be priced on a 
volumetric basis as long as most of the ethanol is being blended as 
E10.
---------------------------------------------------------------------------

    \26\ EPA-HQ-OAR-2008-0380-057.
    \27\ The lack of model documentation submitted to the docket 
with regard to the model limited our ability to fully compare the 
results.
---------------------------------------------------------------------------

    In his June paper, Elam estimated the impact of waiving the RFS 
under two different scenarios: One based on the June WASDE projections 
and one based on a ``severe weather'' scenario with a lower corn crop. 
Under both scenarios, Elam predicts ethanol production will decrease by 
2.1 billion gallons with a 50% waiver of the mandate. However, under 
both scenarios Elam estimates that ethanol production will exceed the 
mandated levels when the mandate is in place. We do not find this 
analysis plausible, since waiving the mandate should have little to no 
effect on ethanol production if the projected levels of ethanol demand 
exceed the mandate. In addition, we would not expect the same change in 
ethanol production to occur as a result of the waiver when corn prices 
are $8.00/bushel and when they are $5.80/bushel. When corn costs $8.00/
bushel, we would expect more ethanol producers would not be able to 
cover their operating costs and would choose to reduce production. 
Therefore there would be a larger potential change in ethanol 
production at $8.00/bushel than at $5.80/bushel, which in turn would 
lead to a larger impact from waiving the mandate. Finally, we believe 
the severe weather scenario presented by Elam overstates the impact of 
the recent floods in the Midwest. This scenario assumes a significant 
reduction in corn acres harvested and corn yields relative to the WASDE 
estimates. Under this severe weather scenario, Elam's projected corn 
crop would be 10.85 billion bushels, compared to the higher July WASDE 
estimate that 11.7 billion bushels will be produced in 2008/2009.
    Similar to the ISU model, the TAMU model is a hybrid stochastic 
simulation model that estimates the probabilistic price of corn and 
production levels of ethanol with and without various government 
biofuel policies over the next few years. However, we believe some of 
the inputs used in the model are not as current as the inputs used by 
the ISU model. In addition, the TAMU model likely overstates the 
probability that the mandate will be binding for two reasons. First, 
the projected corn prices are significantly higher than either the June 
or July WASDE reports. Whereas the July WASDE report (which assumes the 
mandate is still in place) predicts corn prices will be between $5.50-
$6.50/bushel, the TAMU model predicts that corn prices with the mandate 
in place will be between $6.70-$7.96/bushel depending on the size of 
the corn crop. If the TAMU model was re-run with the July WASDE data, 
we believe the results would be closer to the estimates provided by the 
ISU model. Second, we believe that the TAMU model undervalues ethanol, 
since it assumes ethanol must compete with gasoline on an energy 
equivalent basis for all volumes over the quantity projected to be used 
to meet reformulated gasoline (RFG) requirements (approximately 3 
billion gallons). As discussed in more detail in the following section, 
ethanol continues to be priced in the market at a premium over its 
energy content since it is primarily used as a gasoline extender. We 
expect this trend to continue until significant quantities of ethanol 
can no longer be blended as E10 and must be sold as E85. If the TAMU 
valued ethanol on a volumetric basis, we would expect the model would 
predict higher production levels of ethanol, both with and without the 
waiver.
    TAMU provides information for three different scenarios: a ``mean 
corn crop'',

[[Page 47175]]

a ``95% of mean corn crop'', and a ``90% of mean corn crop''. Using 
historical information, TAMU estimates that 79 million acres of corn 
will be harvested in 2008/2009 and corn yields will be 153.9 bushels/
acre, resulting in a ``mean corn crop'' production of 12.1 billion 
bushels. The ``95% of mean corn crop'' scenario evaluates the effects 
of a 5% shortfall in corn production (relative to the mean corn crop 
scenario), which corresponds to a crop of 11.5 billion bushels. The 
``90% of mean corn crop'' scenario evaluates the effects of a 10% 
shortfall relative to the mean corn crop, which corresponds to a corn 
crop of 10.9 billion bushels. In the mean corn crop scenario, the TAMU 
estimates that the probability that the mandate will be binding is 42%. 
In the 95% of mean corn crop scenario, the TAMU model predicts that the 
probability that the mandate will be binding is 67%, and in the 90% of 
mean corn crop scenario, the probability that the mandate will be 
binding is 88%.
    Although this mean corn crop scenario production level is higher 
than the July WASDE estimates, the impacts of this scenario are 
directionally consistent with the ISU results. For example, the TAMU 
model predicts that the average expected amount of ethanol that will be 
produced in 2008/2009 will be 10.8 billion gallons, which is higher 
than the RFS mandate. In their comments, however, Texas asserts that a 
shortfall in the range of the 5% or 10% of production ``now appears 
highly likely.'' Therefore, Texas concludes that the mandate will 
``most likely contribute significantly to causing corn price 
increases.'' In light of the July WASDE data, which predicts a corn 
crop that is larger than both the 90% mean corn crop and the 95% mean 
corn crop scenarios, we believe the 90% mean corn crop scenario 
significantly overestimates the potential impact of the flooding. We 
believe the mean corn crop and the 95% of mean corn crop scenarios are 
more credible than the 90% mean corn crop scenario.

           Table 1--Comparison of Key Studies Estimating Corn and Ethanol Prices and Production Levels
----------------------------------------------------------------------------------------------------------------
                                               Elam scenario    TAMU mean corn  Iowa state mean
                                               based on WASDE        crop           estimate     USDA benchmark*
----------------------------------------------------------------------------------------------------------------
Mean Corn Prices with Mandate ($/bushel)....            $5.80            $6.70            $6.00      $5.50-$6.50
Mean Corn Prices with Waiver ($/bushel).....            $4.75            $6.36            $5.93  ...............
Change in Corn Prices with Waiver...........           -$1.05           -$0.34           -$0.07  ...............
Mean Corn Production (Billion bushels)......            11.74            12.14            11.70            11.70
Mean Ethanol Price with Mandate ($/gal).....            $2.76            $2.89            $2.59  ...............
Mean Ethanol Price with Waiver ($/gal)......            $2.76            $2.76            $2.57  ...............
Mean Domestic Ethanol Demand w/Mandate                  11.00            10.78            11.05  ...............
 (Billion gallons)..........................
Mean Domestic Ethanol Production w/Waiver                8.94            10.05            10.90  ...............
 (Billion gallons)..........................
Probability that Mandate is Binding.........              N/A              42%              24%  ...............
----------------------------------------------------------------------------------------------------------------

    Since Congress enacted the Energy Policy Act in 2005, biofuel 
production has consistently been higher than the RFS mandated levels, 
which is an indication that factors other than the RFS requirements 
have been the primary drivers of biofuel growth. In addition, in its 
2007 Annual Energy Outlook (AEO), the Energy Information Administration 
(EIA) projected that even without the recent renewable fuels 
requirement in EISA, ethanol use would increase to 12 billion gallons 
in 2010. This dramatic increase in ethanol use was estimated to occur 
despite assuming crude oil prices in the $50 to $60 dollar per barrel 
range. Assuming other factors remain constant, the higher oil prices 
that we are experiencing now would provide an even greater incentive to 
produce and use additional ethanol from corn.
    ISU's estimate for the maximum ethanol capacity in 2008/2009 is 
13.5 billion gallons, which is similar to EPA's estimate that over 13 
billion gallons of plant capacity was on-line or under construction as 
of December 19, 2007 when EISA was passed.\28\ Once ethanol production 
capacity is built, we expect ethanol producers will continue making 
ethanol to the extent that they can cover their operating costs. 
Therefore, ethanol production in the short term is highly dependent on 
the built capacity of the ethanol industry rather than the mandate.
---------------------------------------------------------------------------

    \28\ These estimates are for the ethanol production capacity and 
are higher than the volumes of ethanol that are projected to be 
produced. See Memorandum to Docket entitled, ``Ethanol Capacity 
Estimates.''
---------------------------------------------------------------------------

    Certain empirical data also supports the projection that the RFS is 
unlikely to be binding in the 2008/2009 timeframe. For example, the 
price of tradable renewable identification number (RIN) credits remains 
relatively low: Below five cents per gallon as of July 1, 2008. 
Refiners and importers verify their compliance with the RFS by 
collecting and expending RINs, which are assigned to volumes of 
renewable fuel by their producers. Refiners and importers use RINs for 
an appropriate volume of renewable fuel to demonstrate compliance with 
their RFS volume requirement. Parties that exceed their RFS obligations 
for a compliance period can trade excess RINs to other parties that 
need them for compliance. When the mandate is expected to be binding, 
we would expect the demand for RINs would increase and the supply of 
excess RINs to decrease, leading to an increase in price for RINs.
    The RIN banking and rollover provisions of the RFS also allow 
obligated parties to use or trade current RINs in the next compliance 
period. Therefore, we would expect the current RIN price to reflect the 
market's current and near-term expectations about how binding the RFS 
is likely to be. The most recent available data shows that the RIN 
price was below 3 cents per gallon of ethanol on July 18, 2008. This 
RIN price represents a very small share of the price of a gallon of 
ethanol, suggesting that refiners and blenders expect the RFS is not 
likely to be binding in 2008 or 2009. It is possible that RIN prices 
have been depressed by market uncertainty generated by Texas' waiver 
request. However, the record high RIN price before the Texas waiver 
request was only approximately 6.5 cents per gallon. Unlike the 
previous discussion in this section which involved different 
agricultural sector models that seek to evaluate the impacts of the 
RFS, the RIN price is the result of actual market outcomes, as opposed 
to a modeled result. EPA believes the RIN price information is one 
additional way to evaluate the likelihood of an impact from 
implementation of the RFS. In this case, the RIN price information 
corroborates the modeled impacts of the RFS.

[[Page 47176]]

2. Severity of Impact

(a) Corn Price Impacts
    When evaluating the economic impacts of waiving the mandate, our 
analysis centered on four major areas: U.S. corn prices, food prices, 
feed prices, and fuel prices. While there may be other areas of 
potential impact, we focused on these areas because they are expected 
to have the largest potential economic impacts in the U.S. Given the 
limited time available for this analysis, we have not looked at the 
interaction of these impacts in an integrated modeling system. However, 
we believe that looking at these indicators individually provide a 
useful framework for determining the potential severity of the impact 
of the RFS mandate.
    As described in the previous section, we believe that 
implementation of the RFS would not have a significant impact on 
expected ethanol production in 2008/2009, with the most likely result 
being no impact on ethanol production. We have analyzed the impacts of 
waiving the mandate under a wide variety of scenarios, ranging from 
worst case scenarios to the more likely situations. Based on the ISU 
modeling results, the average expected impact of waiving the mandate 
over all the potential outcomes, both those binding and those non-
binding, would be a decrease in the price of corn by $0.07/bushel. In 
the limited subset of potential outcomes in which the mandate is 
binding (24% of the results), waiving the mandate would result in an 
average expected decrease in the price of corn of $0.30/bushel.
    However small the probability, we also recognize it is possible 
that all the market outcomes could converge to result in a worst case 
scenario, therefore, we also provide this example to help bracket the 
range of potential outcomes. The ``Worst Case'' example demonstrates 
the largest potential change in corn price predicted by the ISU model 
as a result of the waiver, which is a decrease in corn prices of $1.38/
bushel. Table 2 presents the three ISU scenarios.

                          Table 2--Range of Estimated Corn Prices and Production Levels
----------------------------------------------------------------------------------------------------------------
                                                                                                    Iowa state
                                                             Iowa state mean   Iowa state when    ``worst case''
                                                                 estimate       mandate binds        example
----------------------------------------------------------------------------------------------------------------
Mean Corn Prices with Mandate ($/bushel)...................            $6.00              $6.40            $6.85
Mean Corn Prices with Waiver ($/bushel)....................            $5.93              $6.10            $5.47
Change in Corn Prices with Waiver ($/bushel)...............           -$0.07             -$0.30           -$1.38
Mean Corn Production (Billion bushels).....................            11.70              11.22            10.57
Percentage of Times Mandate is Binding.....................              24%               100%              N/A
----------------------------------------------------------------------------------------------------------------

 (b) Food Price Impacts
    In consultation with USDA, EPA estimated how the changes in corn 
prices influence U.S. food prices. The results of the modele