U.S. Supreme Court Decision Adds to RFS Uncertainty

On Friday, June 25, the United States Supreme Court issued an opinion determining the availability of an extension to the small refinery[i] hardship exemption within the renewable fuel standards program (RFS). The exemption waives the RFS requirement to blend renewable fuels into any transportation fuels a small refinery produces if the mandate would cause a “disproportionate economic hardship.[ii]” In its 6-3 opinion, the Court ruled that small refineries could apply for an “extension” to the exemption, even if a prior exemption had lapsed. Hollyfrontier Cheyenne Refining, LLC v. Renewable Fuels Association, No. 20-472 (U.S. Supreme Ct. June 25, 2021). The case—which reversed a 2020 decision from the United States Court of Appeals for the Tenth Circuit[iii]—was a defeat for renewable fuel producers, who argued that Congress intended the exemption to be narrow and temporary. The decision ultimately turned on the court’s interpretation of the word “extension.” Although this decision may lead to more small refinery exemptions in the near term, it sheds little light on the future of the RFS and the approach the Biden administration will take toward its enforcement.

History of the Statute

Congress initiated the RFS with passage of the Energy Policy Act of 2005,[iv] an amendment to the Clean Air Act. Congress later expanded the program by passing the Energy Independence and Security Act of 2007.[v]  The current RFS requires refineries and gasoline and diesel importers to blend renewable fuel into transportation fuel in increasing amounts through 2022. The four renewable fuel categories include:

• Biomass-based diesel
• Cellulosic biofuel
• Advanced biofuel
• Total renewable fuel

These fuels fall into either one of two higher-level categories: unspecified biofuel, which mainly comprises cornstarch ethanol, and advanced biofuel, which includes biofuels made from nonfood and nonfeed crops. Congress set initial volume requirements for the RFS, but also granted the Environmental Protection Agency (EPA) much discretion in the program’s implementation. Initially, Congress required the inclusion of four billion gallons of renewable fuels into the U.S. fuel supply. That amount is increased to 36 billion gallons by 2022. After that, the EPA will largely set the applicable required volumes. In addition to mandating overall renewable fuel volumes, the statute requires that advanced biofuel, not unspecified biofuel, ultimately makes up the largest volume of required renewable fuel. In 2022, for example, the statute requires that advanced biofuel must comprise 60 percent of the 36 billion-gallon mandate. In comparison, the EPA’s final 2020 rulemaking required 20.09 billion gallons of total renewable fuel—15 billion gallons from conventional biofuel and 5.09 billion gallons from advanced biofuel.

Since the inception of the RFS, the EPA has apportioned the mandate into an individual requirement for each refinery. The EPA manages compliance through the issuance of credits called renewable identification numbers. Refineries may comply with the mandate (1) by retiring corresponding credits after blending renewable fuel into their transportation fuel, (2) by purchasing necessary credits from another refinery, or (3) by doing both. The program includes a complex set of waivers, and EPA may waive the RFS in whole or in part, if certain statutory conditions are met. Specific waivers are provided for cellulosic biofuel and biomass-based diesel. EPA may apply a general waiver if insufficient volumes of the renewable fuels are available.

Policy Considerations

This highly technical program, created with the stated goal of decreasing greenhouse gas emissions and lessening reliance on imported oil, has, since its inception, generated much policy debate. Renewable fuel advocates seek a more robust program with fewer waivers, arguing that the RFS reduces greenhouse gas emissions, boosts U.S. energy security, and supports the rural economy. Opponents urge restrictions or a complete repeal of the program, arguing that it artificially inflates fuel and food costs and harms the oil industry, all while failing to deliver promised environmental benefits.

While the Trump administration significantly increased the waivers available to refiners throughout its four years, last November the Trump DOJ asked the U.S. Supreme Court to leave the 10^th Circuit decision opposing the small refinery exemption extension in place. Many have believed that the Biden administration—in its stated quest to implement a climate-friendly agenda—would support the RFS and seek to limit waivers extended under the program. The Biden solicitor general argued in favor of the 10^th Circuit interpretation before the Supreme Court. Recent news reports, however, suggest that the administration may be considering ways to provide relief from the RFS mandates to U.S. oil refiners.[vi]  It is unclear how the new Supreme Court decision will impact these discussions. In response to the reports, on June 16, 2021, a group of 15 Democratic lawmakers, led by Senator Amy Klobuchar from Minnesota, wrote a letter to the Biden administration, expressing concerns that the administration may be considering options to exempt oil refiners from their RFS obligations. The letter stated:

Exempting refiners of their obligations to blend biofuel would mean increased reliance on oil and more carbon emissions – a result this country cannot afford if we are to meet our new commitment under the Paris Agreement to reduce emissions by 50 – 52 percent by 2030.

Rather than exempting refiners of their obligations under the Clean Air Act, the Administration should provide additional certainty and stability to the renewable fuels marketplace that will create jobs, drive investment, and cut carbon emissions from the existing vehicle fleet. We encourage your Administration to swiftly issue a proposed rule for the 2021 and 2022 Renewable Volume Obligations (RVOs) with strong blending targets and respond to the 2017 Court remand in Americans for Clean Energy, et al., v. Environmental Protection Agency to reinstate 500 million gallons of blending requirements inappropriately waived from the 2016 blending targets.

Court Opinion

It is against this backdrop, that the U.S. Supreme Court released its opinion answering a very narrow question, in relation to the larger policy debate:

Is a small refinery that manages to comply with renewable fuel mandates in one year forever forbidden from applying for an “extension” in any future year?  

In a decision that had everything to do with the textual interpretation of a single word and little to do with policy (Gorsuch, Roberts, Breyer, Kavanaugh, and Alito comprised the majority and Barrett, Sotomayor, and Kagan dissented), the Court answered the question, “No.” Justice Gorsuch, writing the majority opinion, stated that the correct interpretation of the statute is that a small refinery can apply for a hardship exemption at any time.

The Meaning of the Word “Extension”

In considering the viability of the extension, the Court reviewed the history of the small refinery exemption. The Court explained that Congress included in the original law a special exemption for small refineries that produce (on average) fewer than 75,000 barrels a day per year. 42 U.S.C. §7545(o)(1)(K).  These small refineries had a blanket exemption until calendar year 2011. §7545(o)(9)(A)(i).  At that time, Congress instructed EPA to extend that exemption for at least two years if the Secretary of Energy determined that the RFS obligations would impose a “a disproportionate economic hardship” on a given small refinery.  §7545(o)(9)(A)(ii).  Additionally, in the provision directly at issue in the case before the Court, Congress provided the possibility of an extension of the exemption:   

A small refinery may at any time petition the Administrator for an extension of the exemption under subparagraph (A) for the reason of disproportionate economic hardship.  § 7545(o)(9)(B)(i).

The Court detailed that once the RFS went into effect, all small refineries were exempt through 2010.  Then, in 2011, EPA extended that exemption for 13 small refineries under subparagraph (A)(ii)—and for an additional 11 small refineries under subparagraph (B)(i). As economic conditions fluctuated, the Court explained that the EPA extended more exemptions under subparagraph (B)(i) in some years than in others, granting 8 small refinery exemptions in 2013, but expanding that to 31 small refineries in 2018.

The renewable fuel producers filed their challenge in this case based upon three small refinery exemption extensions EPA granted pursuant to §7545(o)(9)(B)(i) between 2017 and 2018. All three refineries received their exemption extensions after a lapse of a prior exemption or, in other words, after a period of compliance with the RFS. The renewable fuel producers argued and the Tenth Circuit agreed that the EPA could not grant an exemption extension, under the plain meaning of the law, once a prior exemption had lapsed. In vacating the EPA’s decisions, the Tenth Circuit stated:

The statute limits exemptions to situations involving "extensions," with the goal of forcing the market to accept escalating amounts of renewable fuels over time. None of the three small refineries here consistently received an exemption in the years preceding its petition. The EPA exceeded its statutory authority in granting those petitions because there was nothing for the agency to "extend."  

In reviewing the Tenth Circuit decision, the Court stated at the onset that the word at issue, “extension,” is not defined in the statute. The Court explained that where Congress does not furnish a definition of its own, a court is to afford a statutory term its “ordinary or natural meaning.” The Court noted that the word “extension” can mean different things, depending on the context. Therein was the challenge.

Initially, the Court agreed with the Tenth Circuit that the statute was using the word “extension” in its temporal sense, meaning that it was referring to a lengthening of time, as opposed to just an offering or granting of a benefit. The Court’s interpretation diverged from that of the Tenth Circuit’s, however, with respect to whether the word “extension” imposed a continuity requirement. The Court determined that there was no such requirement. “It is entirely natural—and consistent with ordinary usage—to seek an ’extension’ of time even after a lapse,” the Court reasoned. “Think of the forgetful student who asks for an ‘extension’ for a term paper after the deadline has passed, the tenant who does the same after overstaying his lease, or parties who negotiate an ‘extension’ of a contract after its expiration.” The Court noted that the respondents (renewable fuel producers) were unable to point to a single dictionary definition of the term “extension” requiring unbroken continuity. After a lengthy discussion on this point, the Court concluded that the natural meaning of the exemption, as written by Congress, is that “a small refinery can apply for (if not always receive) a hardship extension ‘at any time.’”

The Court then addressed the respondents’ policy argument that the intent of the law was to “funnel small refineries toward compliance over time.” As such, they argued that any exemption extension should be interpreted narrowly to advance the congressional goals of “increasing biofuel production, energy independence, and environmental protection.” In response to this argument, the Court explained that the small refineries presented a “plausible competing narrative.” The petitioners contended that Congress, through the exemption extension, intended to provide a “safety valve” so that small refineries would not be driven from the market by economic hardship. The ability of a small refinery to achieve compliance in one year, the petitioners alleged, was in no way dispositive of its ability to comply in a future year. Congress created the hardship exemption, they contended, to address this problem.

Acknowledging that “neither the statute’s text, structure, nor history afford us sufficient guidance to be able to choose with confidence between the parties’ competing narratives and metaphors,” the Court concluded by reiterating that its decision could only be guided by the statute’s text. Finding that the text of the statute included no continuity requirement, the Court held that the respondents did not show that the EPA’s approval of the extension requests exceeded the agency’s authority.

Dissent

The dissenting opinion—authored by Justice Barrett and joined by Justices Sotomayor and Kagan—argued that the statute’s text and structure directed a clear answer, one in opposition to that reached by the majority. “EPA cannot ‘extend’ an exemption that a refinery no longer has.” The dissent argued that the Court’s contrary conclusion catered to “an outlier meaning” of the word “extend” and “clashes with statutory structure.”

The dissent faulted the majority opinion as choosing an interpretation that was “possible” rather than choosing the most natural read or the most common usage of the word “extension.” The dissenters elaborated:

The Tenth Circuit’s answer to that question is spot on: The “ordinary definitions of ‘extension,’ along with common sense, dictate that the subject of an extension must be in existence before it can be extended.”

After a lengthy explanation as to why the majority had misinterpreted the law, the dissent pointed out the holding leads to an odd result. Under the majority’s interpretation, the EPA exemption power applies only to those small refineries in existence at the onset of the renewable fuel program. This result, the dissenting Justices urge, makes little sense if the exemption was indeed to function as a “safety valve.” “It is hard to see why the provision would distinguish between old and new refineries facing ‘the same current economic outlook’ in a given year.”

What’s Ahead?

This case was an anomaly before the U.S. Supreme Court. It is unusual that the Justices would accept a case and decide it based upon a decision from one jurisdiction involving the disputed definition of a single word in a statute. It is unclear at this point what impact this decision will have on the RFS. RIN prices, which had risen to record levels earlier in the year, dropped upon the release of the opinion, as did corn futures. As discussed above, however, larger, more impactful questions remain regarding how the Biden administration will manage the program moving forward. In the near term, EPA will propose volume mandates for 2021[vii] and 2022, as well as address pending requests for exemptions in light of this decision. We will be watching for updates on this important policy matter.