There has been a lot of leaking lately in DC about renewable volume obligations (RVOs) for the RFS in 2026 and perhaps 2027. These leaks suggest the Trump EPA will propose an increase in the biomass-based diesel (BBD) RVO from 3.35 billion gallons in 2025 to around 5.25 billion gallons in 2026. This would be a very robust increase in the BBD RVO, and the news has boosted both feedstock and RIN prices. However, there is a dark cloud hanging over all discussions of future RVOs—small refinery exemptions, or SREs.
In the first Trump Administration, SREs were used as a “back door” tool for cutting the RVOs. Here is how it worked. Assume petroleum gasoline and diesel use for a future compliance year is projected to be 150 billion gallons, and there is only one generic biofuel. In the final rulemaking for the compliance year (made sometime previous to the compliance year), the RVO for the biofuel is set at 15 billion gallons. In fractional terms, this means the RVO is 10% for obligated parties. Each obligated party will multiply its production of gasoline and diesel during the compliance year by 10% to compute the gallons of biofuel that it must demonstrate were blended with gasoline and diesel. The key is that the 10% is set in stone once the final rulemaking is issued. Now, sometime later during the actual compliance year, the EPA announces that 15 billion gallons of SREs have been awarded. The effective RVO is now (150-15) X 10% = 13.5 billion gallons because the SRE gallons are no longer obligated at the same time the fractional standard is fixed. Magically, 1.5 billion gallons of the biofuel mandate disappeared. This is exactly what happened from roughly 2017-2019 under the first Trump Administration, and it has spawned a long-running legal battle that has reached the steps of the U.S. Supreme Court.
There is a “fix” for cutting RVOs through SREs via something called “reallocation.” If one knows that 15 billion gallons of SREs will be awarded, they can be accounted for in the computation of fractional standards as follows: simply divide 15 billion gallons by the reduced obligation, 160 – 15 billion gallons, which equals 11.1%. This essentially makes larger refiners cover the obligation of smaller exempted refiners. The difficulty with reallocation is that you have to be able to forecast the level of SREs that will be awarded in the future.
As if all of this were not complicated enough, there is also the issue of past disputed SREs because of legal battles and changing political winds in DC. Right now, the EPA SRE dashboard lists 161 pending SRE petitions covering 2016-2025. Some of these may represent re-petitions, but the potential cumulative size of obligated gasoline and diesel volumes represented by these petitions could easily run into the tens of billions of gallons. Between past SRE petitions and potential new petitions for 2026, SREs could easily offset all of the rumored increase in RVOs for 2026.
Is there any way to avoid a repeat of the legal and political battles over SREs that occurred under the first Trump Administration? I believe there is a straightforward “ceasefire” agreement that could be worked out. Here are the key provisions:
- Issue a blanket waiver for all small refineries that exempts them from obligations under the RFS starting in 2026. Forever. This is not as radical as it sounds. A blanket waiver was given in 2010, 2011, and 2012 as the RFS was first being stood up. If it has been done before, it can be done again.
- Since all small refineries are exempted, it is a straightforward exercise to reallocate their aggregate gasoline and diesel obligations in the computation of final RVOs going forward.
- In exchange for being released from all future obligations under the RFS, small refiners as a group agree to stop all legal proceedings with respect to past SREs.
- Biofuel groups also agree to stop all legal proceedings concerning past SREs and efforts to reallocate past SRE volumes in future RVOs.
This simple proposal has the benefit of forcing small refiners to reveal their true motivation for seeking SREs. They have consistently argued that RFS compliance is an undue burden that places them at a competitive disadvantage in the gasoline and diesel markets. If this is true, then small refiners should welcome this proposal. But if their true motivation is part of a larger strategy by the crude oil refining sector to cut the RVOs because they oppose further expansion of biofuel use, then opposition to this proposal will help reveal it.
Similarly, this proposal will help reveal the true position of large refiners about the future of the RFS. A trade group representing large refiners and biofuel trade associations jointly sent a letter earlier this year to Lee Zeldin, the new Administrator of the EPA, arguing for increases in the RVOs starting in 2026. This certainly has the appearance of being a significant change in the political position of large refiners vis-a-vis the RFS, and this makes sense given their investment in renewable diesel plants over the last five years. If large refiners have truly had a change of heart and now support the RFS, they should also welcome this proposal because SREs could offset much, if not all, of the RVO increases being contemplated. While it is true that large refiners will have bigger obligations to manage without SREs, the evidence is compelling that they can pass RIN costs on through the price of gasoline and diesel relative to the price of crude oil (“the crack spread”).
The proposal will also help reveal the willingness of the biofuel industry to compromise to take the SRE issue off the table. The biofuel industry absorbed billions of dollars in damages from SREs in the first Trump Administration. Under the terms of this proposal, the biofuel industry would not attempt to recover these damages either through the courts or through reallocation of historical SREs in future RVO rulemakings.
It is difficult to envision a cessation of political hostilities between the crude oil and biofuel industries over the RFS without a settlement of the SRE issue as outlined here. Lawyers will be the only winners if the SRE wars continue to drag on endlessly.
Laurence J. Norton Chair of Agricultural Marketing
University of Illinois at Urbana-Champaign
Would there need to be a full reallocation of exempt volumes? I thought analysis indicated that ethanol would be used regardless of whether exemptions were granted.
You are correct that analysis (at least my own) shows little if any damage to ethanol demand. However, this does not mean that the impact of SREs is reduced. Instead, the full weight of the SREs falls on the demand for biomass-based diesel. So, there is need for full reallocation to offset the demand destruction for BBD wrought by SREs.
Scott – I like your problem solving skills and approach here. Policies should be adjusted because they are not perfect out of the gate, should adjust over time, while providing certainty for markets, owners and investors. This would be true for biofuels, as well as solar, wind, and any other emerging technologies.
My understanding is that you would only need to reallocate the exempted volume that pertains to BBD/cellulosic rather than the portion of the RVO that is met purely through the use of D6 RINs. Full reallocation would almost impose an artificially increased ethanol mandate (changing the burden under the RFS from consumption of ethanol as transportation to an obligation to retire D6 RINs). Is there a way to avoid impacting the BBD volumes by reallocating only that category instead of the full RVO? That could be a good compromise too.