Argued: December 7, 2017
Petition for Review of Final Agency Action of the United
States Environmental Protection Agency.
Jonathan Grant Hardin, PERKINS COIE LLP, Washington, D.C.,
Patrick Reinhold Jacobi, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Respondent.
M. Johnson, PERKINS COIE LLP, Washington, D.C., for
Jeffrey H. Wood, Acting Assistant Attorney General,
Environmental and Natural Resources Division, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C.; Susan Stahle, UNITED
STATES ENVIRONMENTAL PROTECTION AGENCY, Washington, D.C., for
NIEMEYER and AGEE, Circuit Judges, and Paula XINIS, United
States District Judge for the District of Maryland, sitting
2011, Ergon-West Virginia, Inc. enjoyed an exemption as a
small refinery from the Environmental Protection Agency's
renewable fuel standard program, which requires refineries
and other facilities to allocate a certain percentage of
their fuel production to renewable fuels. When Ergon filed
for an extension of the small refinery exemption, the EPA
denied its petition on the basis that Ergon's
participation in the program would not constitute a
disproportionate economic hardship. Ergon petitions the Court
for review of the EPA's denial. Because we conclude that
the EPA's decision was arbitrary and capricious, we grant
Ergon's petition for review, vacate the EPA's denial,
and remand for further proceedings.
begin with the renewable fuels statute and its history and
then turn to the proceedings in this case.
the Energy Policy Act of 2005, Congress added the renewable
fuel standard program (the "RFS Program" or
"Program") as Section 211(o) of the Clean Air Act.
See 42 U.S.C. § 7545(o). The statute directs
the EPA Administrator to promulgate regulations "to
ensure that transportation fuel sold or introduced into
commerce in the United States (except in noncontiguous States
or territories), on an annual average basis, contains at
least the applicable volume of renewable fuel, advanced
biofuel, cellulosic biofuel, and biomass-based
diesel" required by the Program. Id.
§ 7545(o)(2)(A)(i). Renewable fuels, such as ethanol,
are those that are "produced from renewable biomass and
that [are] used to replace or reduce the quantity of fossil
fuel present in a transportation fuel." Id.
§ 7545(o)(1)(J). Renewable biomass includes natural
materials such as crops, trees, and animal byproducts.
Id. § 7545(o)(1)(I). The regulations apply
"to refineries, blenders, distributors, and
importers." Id. § 7545(o)(2)(A)(iii)(I).
applicable volumes of renewable fuel, advanced biofuel,
cellulosic biofuel, and biomass-based diesel that
transportation fuels must contain on an industry-wide basis
are found in § 7545(o)(2)(B). For instance, the statute
lists the applicable volume of renewable fuel for 2016 as
22.25 billion gallons. Id. §
7545(o)(2)(B)(i)(I). To determine the "applicable
percentages" of renewable fuel, advanced biofuel,
cellulosic biofuel, and biomass-based diesel that a facility
must use, the EPA first estimates "the volumes of
transportation fuel, biomass-based diesel, and cellulosic
biofuel projected to be sold or introduced into commerce in
the United States" the following year. Id.
§ 7545(o)(3)(A). The EPA then divides the applicable
volume of the particular renewable fuel by the fuel estimate
to arrive at the percentage every refinery must meet and
publishes it in the Federal Register. Id. §
7545(o)(3)(B); 40 C.F.R. § 80.1405. For example, the
percentage of renewable fuel for 2016 was 10.10%. 40 C.F.R.
§ 80.1405(a)(7)(iv). This percentage-or "renewable
fuel obligation"-is "applicable to refineries,
blenders, and importers, as appropriate, " and is
"expressed in terms of a volume percentage of
transportation fuel sold or introduced into commerce in the
United States." 42 U.S.C. § 7545(o)(3)(B)(ii). A
refinery will multiply the percentage by the volume of
nonrenewable fuel that it produces or imports to determine
its "renewable volume obligation." 40 C.F.R. §
renewable fuels are identified by a renewable identification
number ("RIN"), which "is a unique number
generated to represent a volume of renewable fuel." 40
C.F.R. § 80.1401. An obligated party must
"separate" a sufficient number of RINs (i.e., blend
the renewable fuel with nonrenewable fuel) to demonstrate
compliance with the Program. See id. §§
80.1427-80.1429; see also 42 U.S.C. §
7545(o)(5) (establishing a credit program for blending
renewable fuels with transportation fuels). If the obligated
party fails to separate the required number of RINs, it can
purchase separated RINs from a party who has separated more
RINs than it needs and thereby avoid violating the
Program's requirements and incurring penalties.
See 40 C.F.R. §§ 80.1428, 80.1460(c)(1);
see also 42 U.S.C. § 7545(o)(5)(B) (stating
that "[a] person that generates credits . . . may use
the credits, or transfer all or a portion of the credits to
another person, for the purpose of complying with [the
2005 until 2011, small refineries-those "for which the
average aggregate daily crude oil throughput for a calendar
year . . . does not exceed 75, 000 barrels," 42 U.S.C.
§ 7545(o)(1)(K); see also 40 C.F.R. §
80.1442-were exempt from the Program, 42 U.S.C. §
7545(o)(9)(A)(i); see also 40 C.F.R. § 80.1441.
The statute directed the Secretary of the Department of
Energy to "conduct for the [EPA] Administrator a study
to determine whether compliance with the [Program's]
requirements . . . would impose a disproportionate
economic hardship on small refineries." 42 U.S.C.
§ 7545(o)(9)(A)(ii)(I) (emphasis added). If the DOE
determined that a given refinery would experience
disproportionate economic hardship, then the EPA
Administrator was required to extend the facility's
exemption for at least two years. Id. §
7545(o)(9)(A)(ii)(II). After this first mandatory extension
period, the statute provides that a facility may petition the
EPA for extension of the exemption "at any time"
due to disproportionate economic hardship. Id.
§ 7545(o)(9)(B)(i). This petition "must specify the
factors that demonstrate a disproportionate economic hardship
and must provide a detailed discussion regarding the hardship
the refinery would face in producing transportation fuel
meeting the [Program's] requirements." 40 C.F.R.
§ 80.1441(e)(2)(i). In evaluating the petition, the
EPA-"in consultation with" the DOE-must
"consider the findings of the [DOE's] study . . .
and other economic factors." 42 U.S.C. §
2009, the DOE presented the EPA with the Small Refineries
Exemption Study (the "2009 Study"), as required by
42 U.S.C. § 7545(o)(9)(A)(ii)(I). The 2009 Study
recognized that "[o]bligated parties, such as
refineries, may fulfill their renewable fuel requirements
through either blending renewable fuels into their products
or purchasing credits from other parties who have exceeded
their allocation of renewable fuel consumption." J.A.
15. The DOE determined that, "[a]s long as credits are
available for purchase and the market is competitive, small
refineries should not be subject to disproportionate economic
hardship from their choice to purchase credits rather than to
generate them." J.A. 15. The 2009 Study concluded that the
general small refinery exemption should not be extended
beyond 2010, based largely on its determination that
"credits are available at a nominal value and compliance
volumes have been in excess of the RFS requirements."
with this result, Congress directed the DOE to conduct a new,
more in-depth analysis. The DOE released this new study in 2011
(the "2011 Study"). The 2011 Study defined
disproportionate economic hardship as "increased cost of
compliance to the point that the current or future viability
of the refinery is impacted." J.A. 47. The DOE
[s]mall refineries can suffer disproportionate economic
hardship from compliance with the RFS program if blending
renewable fuel into their transportation fuel or purchasing
RINs increases their cost of products relative to competitors
to the point that they are not viable, either due to loss of
market share or lack of working capital to cover the costs of
J.A. 47. After conducting a survey of small
refineries, the DOE created a scoring matrix composed of two
indices-the "Disproportionate Impact Index" and the
"Viability Index"-to be used to determine whether a
small refinery suffers disproportionate economic hardship:
10. Disproportionate ...