EPA Update: The Latest on Renewable Fuels Policy and Regulation National Ethanol Conference Nashville, TN February 18, 2025 Matthew W. Morrison Pillsbury Winthrop Shaw Pittman LLP

Key Updates 2 • Light Duty Tailpipe Rule and Associated Litigation • RFS Set Rules: A New Era for EPA and RVOs • RFS Small Refinery Exemptions • The Demise of Chevron Deference – Implications for RFS

EPA’s 2024 Light/Medium Duty Tailpipe Rule 3 • Section 202 of the Clean Air Act authorizes EPA to regulate emissions from motor vehicles that contribute to air pollution. • Based on this authority, in April of 2024 EPA finalized tailpipe CO2 emissions standards for 2027-2032 light-duty vehicles. • EPA estimated the standards will result in battery electric vehicles (BEVs) making up more than 50% of U.S. auto sales by 2032. • Yet BEVs accounted for just 8% of U.S. light duty auto sales in 2024.

EPA’s 2024 Light/Medium Duty Tailpipe Rule 4 • To meet the new EPA standards, automakers will need to dramatically increase production and sale of BEVs to meet the standards. • EPA’s tailpipe standards aim to incentivize BEVs, plug-in hybrids, and conventional hybrids, but ignore the emissions reduction potential of renewable fuels.

Legal Challenge to EPA’s 2024 Light/Medium Duty Tailpipe Rule 5 • RFA and numerous other groups (petroleum interests, corn growers, auto dealers, etc.) filed suit, challenging EPA’s tailpipe standards in federal court. • A key reason for RFA’s involvement in the lawsuit was the Biden Administration’s decision to consider BEVs to be “zero emissions” for purposes of compliance with the tailpipe standards.

6 • The tailpipe standards treat BEVs as producing 0 g/mi of CO2 throughout their entire life cycle, totally ignoring the CO2 emissions that come from generating the electricity that powers BEVs or from extracting the minerals for producing BEVs. • At the same time, EPA disregarded the full lifecycle emission reduction benefits of renewable fuels in the tailpipe standards. Legal Challenge to EPA’s 2024 Light/Medium Duty Tailpipe Rule

Key Arguments Raised by Those Challenging EPA’s 2024 Light/Medium Duty Tailpipe Rule 7 • EPA exceeded its authority under Section 202 of the Clean Air Act and violated the Administrative Procedures Act by effectively mandating a shift to EVs for 2027-2032. • EPA’s rule also implicates the Major Questions doctrine (WV v EPA), and the statute lacks clear Congressional authorization. • EPA cannot rely on fleetwide averaging when section 202 only authorizes standards for each vehicle’s emissions • EPA’s decision to count EVs as having zero GHG impact for purposes of the rule was arbitrary and capricious, and as was EPA’s decision to overlook available GHG reductions from renewable fuels

New Administration, New Litigation Position? 8 • The Biden Administration finalized the Tailpipe Rule in 2024 and vigorously defended its approach in federal court when the rule was challenged. • The Biden Administration was also defending against challenges to: • The 2024 heavy duty vehicle tailpipe standards; • Previous light/medium duty tailpipe standards that EPA finalized in 2022; and • EPA’s granting a waiver to California, allowing California to set even more stringent emissions standards than EPA

9 • On Inauguration Day, President Trump signed Executive Order 14,154, “Unleashing American Energy.” That order announces the President’s policy of: • “eliminat[ing] the ‘electric vehicle (EV) mandate’ and promot[ing] true consumer choice…by removing regulatory barriers to motor vehicle access; by ensuring a level regulatory playing field for consumer choice in vehicles; . . . and by considering the elimination of unfair subsidies and other ill-conceived government-imposed market distortions that favor EVs over other technologies and effectively mandate their purchase by individuals, private businesses, and government entities alike . . . .” • Although briefing (and oral argument) in the case was set to continue into 2025, petitioners representing renewable and petroleum fuels on February 6 filed a motion for abeyance of the litigation, in large part to allow EPA time to reconsider its approach. • EPA did not object to the request, which the DC Circuit has yet to decide. New Administration, New Litigation Position?

10 The Set Rule: A New Era in the RFS Program

EPA Has New Statutory Authority in Setting RVOs 11 • Up until 2022, Congress wrote annual RFS volumes into the statute. • Starting in 2023, Congress handed the pen to EPA and empowered it with discretion to set the annual volumes based on consideration of six factors (the “Set Factors”). • Upshot: up until 2022, the RFS gave the ethanol industry relative stability because Congress determined the volumes. Now EPA has much more discretion to determine the annual volumes. • These are the same factors that EPA was required to apply if EPA “waives” the statutory volumes set by Congress by more than 50% in any one year or more than 20% in two consecutive years (EPA’s “Reset” Authority)

Statutory Factors EPA Must Consider When Setting RVOs 12 1. The impact of the production and use of renewable fuels on the environment, including on air quality, climate change, conversion of wetlands, ecosystems, wildlife habitat, water quality, and water supply; 2. The impact of renewable fuels on the energy security of the U.S.; 3. The expected annual rate of future commercial production of renewable fuels and advanced biofuels in each category (cellulosic biofuel and biomass-based diesel); 4. The impact of renewable fuels on the infrastructure of the U.S., including deliverability of materials, goods, and products other than renewable fuel, and sufficiency of infrastructure to deliver and use renewable fuel; 5. The impact of the use of renewable fuels on the cost to consumers of transportation fuel and on the cost to transport goods; and 6. The impact of the use of renewable fuels on other factors, including job creation, the price and supply of agricultural commodities, rural economic development, and food prices.

D.C. Circuit Affords EPA Broad Discretion in Applying the Statutory Factors 13 • In May 2023, the U.S. Court of Appeals for the D.C. Circuit issued its ruling on the “Reset Rule,” in which EPA revised the annual standards set by Congress for 2020 through 2022. • It was the first decision to speak to how much discretion courts would afford EPA in analyzing and applying the “Set Rule Factors” in CAA Section 211(o)(2)(B)(ii). • The D.C. Circuit sided with EPA and concluded that the agency enjoys broad discretion in setting the standards. • Importantly, the Court also recognized that the RFS still “requires the petroleum industry to introduce increasing volumes of renewable fuel from year to year into the nation's transportation fuel supply” and to do so “each year” • Many of the same groups challenging EPA’s reset authority went on to challenge EPA’s interpretation of its authority to establish annual standards starting in 2023.

RFS Set Rule 1 Litigation 14 • In August 2023, EPA promulgated its first “Set Rule” with volumes for 2023 through 2025. As expected, it was challenged by multiple parties, some of whom thought it went too far, and others who felt it did not go far enough. • Petitioners included environmental groups, refineries, and certain renewable interests. • Key issues: • Whether the volumes set by EPA are a reasonable interpretation of the six statutory factors; • Whether EPA complied with the consultation requirements of the Endangered Species Act; and • Whether EPA’s cost benefit analysis was arbitrary and capricious for failing to consider climate change and land use impacts.

15 • The D.C. Circuit heard oral argument in the case on November 1, 2024, but a decision has yet to be issued. • Unlike the current challenges to the Tailpipe Rules, neither the petitioners nor the Trump administration have moved to pause the case. RFS Set Rule 1 Litigation

Looking Ahead to the Next Set Rule (“Set 2”) 16 • The latest EPA “unified agenda” shows estimated dates for the RVOs for 2026 and beyond: • Proposed rule: March 2025 (could very well be April or May) • Final rule: December 2025 (more than a year after the statutory deadline of October 31, 2024) • The new EPA Administrator, former NY state senator Lee Zeldin, was confirmed on January 29, 2025. Former EPA employee and lobbyist Aaron Szabo was nominated to run EPA’s Office of Air and Radiation. • These and other new appointees are likely working with EPA career staff to get a handle on development of Set Rule 2. • Trump’s support for E15 provides a strong argument for facilitating growth of annual RVOs under the next Set Rule. Need to advocate for continued growth in the volumes – at least 15 billion gallons – plus higher cellulosic and advanced volume requirements.

What do we expect to see in Set Rule 2? 17 • EPA career officials have indicated that Set Rule 2 will likely establish volumes for multiple years, but the exact time period has yet to be determined. • While EPA’s broad discretion led to higher volumes finalized in the Set Rule 1, that same discretion can cut both ways. It could be used to attempt flatlining or reducing renewable volumes as part of Set Rule 2. • Whatever standards are set should be consistent with the judicially-recognized purpose of the RFS – to continuously increase the volumes of renewable fuel to be introduced into the U.S. transportation fuel supply each year. • Congress did not hint or suggest that growth should cease after 2022. • At the same time, federal courts are likely to afford EPA broad discretion in setting the annual standards based on the Set Factors, just as the Court did in the Reset Rule. Newly confirmed EPA administrator Lee Zeldin

18 Small Refinery Exemptions

Brief Refresher on Small Refinery Exemptions • There is an exemption in the RFS for “small refineries” (those that process <75,000 bpd) to petition the EPA for an exemption from their RFS obligations on the basis of “disproportionate economic hardship if required to comply with the RFS” • Small refineries, EPA, and renewable fuel producers have been litigating the exemptions for obligations that date back to compliance year 2016 and up to compliance year 2022. o Primary renewable fuel objection – annual standards become illusory if EPA sets annual standards for blending in renewable fuels but then grants exemptions that effectively reduce the amount of renewable fuel that must be blended. o In the process, the demand and pricing for renewable fuel and RINs drops significantly.

Small Refinery Exemptions Under the Biden Administration • The Biden Administration announced its approach to Small Refinery Exemptions based on two consistent agency findings dating back to 2015: • The cost of RINs is essentially the same for all parties nationally • The costs of generating or acquiring RINs is passed through to purchasers of the blended fuel and recovered in the prices of products sold (know as “RIN cost passthrough”) • Looking at the language of the statute (“disproportionate economic hardship if required to comply with the RFS”), EPA concluded that small refiners had to show the hardship would not have happened but for the RFS program (it had to be one of the causes of the hardship)

• Based on this perspective, in 2022 EPA: • Reversed 34 exemptions the Trump administration had previously granted for compliance year 2018 (April 2022) • Denied 69 pending small refinery exemption petitions (June 2022). • The small refineries objected and sued EPA in various Circuit Courts. All but one case (in the Fifth Circuit) was consolidated into the DC Circuit given the fact that EPA’s new approach was “nationally applicable” and that, in any event, if had a nationwide scope or effect. Small Refinery Exemptions Under the Biden Administration

Small Refinery Exemptions: Supreme Court • Supreme Court agreed to hear a challenge brought by RFA, Growth Energy, and the Biden EPA regarding an important procedural aspect of the Fifth Circuit’s decision in November 2023, namely, which Circuit Court of Appeals should hear the small refinery exemption challenges. • The case turns on whether EPA’s SRE denial actions in April and June 2022 were either “nationally applicable” actions or were based on an EPA determination of “nationwide scope or effect” under Section 307(b)(1) of the Clean Air Act (the “venue” provision). • Fragmented review of EPA’s SRE determinations in each Circuit Court – rather than centralized review in the D.C. Circuit – creates the risk of duplicative litigation and inconsistent rules that undermine the market certainty necessary for a stable RFS program. • Briefing in the case is ongoing. The Trump DOJ sought to put the case in abeyance, but its request was denied.

Fifth Circuit Challenge to EPA’s SRE Denials • Calumet Shreveport Refining LLC v. EPA (Fifth Circuit Nov. 2023) o The Fifth Circuit vacated EPA’s SRE denials for six small refineries covering compliance years 2017-2021, and based its decision on the following grounds: 1. EPA had impermissibly applied its “new analysis” retroactively to deprive the small refineries of their protected property interest in being exempt from RFS Program obligations; 2. Disproportionate economic hardship may be caused by a myriad of factors, including those having nothing to do with the RFS; and 3. The agency acted unreasonably (arbitrary and capricious) in applying its RIN cost passthrough theory because it failed to sufficiently consider refinery-specific information suggesting that not all RFS compliance costs are recouped

DC Circuit Challenge to EPA’s SRE Denials • Sinclair Wyoming Refining Co. LLC v. EPA (D.C. Circuit July 2024) o The D.C. Circuit vacated both the April 2022 denial action and the June 2022 denial action on the grounds that: 1. EPA unlawfully narrowed the exemption by focusing exclusively on compliance costs instead of economic hardship, neglecting the Clean Air Act’s directive to consider “other economic factors,” and by applying an overly strict causation requirement. 2. EPA failed to adequately justify its conclusion that small refineries can purchase RINs on a regular basis and recoup that cost in the sales prices of their fuels. o The court did not, however, address whether EPA’s approach in reversing the 2018 small refinery exemptions was impermissibly retroactive.

Small Refinery Exemptions: What’s next? • EPA will now revisit each of the SRE denials vacated by the Fifth and D.C. Circuits and decide them anew while considering the limitations imposed by those court decisions. • That task of reevaluating these old petitions now falls the Trump EPA • If past is prologue, the Trump EPA might attempt to reinstate at least some of the reopened petitions. • In addition, the agency may grant more exemption requests going forward, now that refiners can point to hardships caused by forces outside the RFS and claim that they were not able to recover their RFS compliance costs. • A key to blunting the impact of a relaxed SRE standard is a reallocation of the exempted volumes among the non-exempt obligated parties, which the Trump EPA did in the 2020 Reset Rule. See 85 Fed. Reg. 7016, 4049-51 (Feb. 6, 2020).

26 The Demise of Chevron Deference: Implications for the RFS

Chevron Deference Doctrine Overturned Loper Bright Enterprises, et al. v. Raimondo; Relentless, Inc. v. Dep’t of Commerce • In June 2024, the Supreme Court overruled the Chevron deference doctrine o Courts may no longer defer to an agency’s interpretation simply because the statute is ambiguous. Instead, courts must exercise their best “independent judgment” in deciding the best reading of the statute. o When exercising their “independent judgment” courts may still give weight to the agency’s interpretation under Skidmore v. Swift & Company (1944). o How much weight depends “upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” o Key difference: weight/respect ≠ requirement to defer to the agency.

Loper Bright: Important Caveats • Loper Bright applies only to how courts review an agency’s interpretation of a statute that it administers. It does not apply to an agency’s policymaking and factfinding determinations. • The Supreme Court reaffirmed that the APA “mandate[s] that judicial review of agency policymaking and factfinding be deferential.” 603 U.S. 369, 392 (2024). • This is especially true when an agency determination implicates its scientific or technical expertise. See, e.g., State of Wisconsin v. EPA, 938 F.3d 303, 320 (D.C. Cir. 2019) (“We are at [our] most deferential when reviewing an agency's predictions and scientific determinations.”) • The Supreme Court also acknowledged that sometimes “the best reading of the statute is that it delegates discretionary authority to an agency.” Id. at 395.

Auer DeferenceLikelyRemains Intact for Regulations • Chevron/Loper Bright concern the level of deference courts should give to an agency’s interpretation of statutes enacted by Congress. • Auer deference, however, requires courts to defer to an agency’s interpretation of its own ambiguous regulations. • The Supreme Court upheld the Auer deference doctrine in Kisor v. Wilkie, 588 U.S. 558 (2019), but reinforced and expanded on the doctrine’s limits in a new five-factor test. • Courts should defer to the agency’s interpretation only if (1) the regulation is genuinely ambiguous;(2) the agency’s interpretation is reasonable; (3) it is the agency’s “authoritative” position; (4) whether it bears on the agency’s expertise; and (4) whether it reflects the agency’s “fair and considered judgment.”

Implications for Future RFS Annual Standards • Loper Bright will impact how EPA interprets statutory provisions of the RFS (like it has in the SRE context), but it will have little to no impact on EPA’s future Set Rules. • In upholding EPA’s Reset Rule, the D.C. Circuit described the applicable standard of review as follows: • We will sustain the EPA's actions… so long as the agency consider[ed] all of the relevant factors and demonstrate[d] a reasonable connection between the facts on the record and the resulting policy choice. • We give an extreme degree of deference to the EPA's evaluation of scientific data within its technical expertise, especially where, as here, we review the EPA's administration of the complicated provisions of the Clean Air Act. And our review is particularly deferential in matters implicating predictive judgments