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Renewable Fuel Standard: Actions Needed to Improve Decision-Making in the Small Refinery Exemption Program

GAO-23-104273 Published: Nov 03, 2022. Publicly Released: Nov 03, 2022.
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Fast Facts

Small refineries can apply for an exemption from the Renewable Fuel Standard, which requires the blending of biofuel into gasoline and diesel. The number of exemptions granted through this program has fluctuated significantly from year to year.

But the Environmental Protection Agency and the Department of Energy don't have the information, policies, or procedures needed to fully ensure that exemption decisions are valid. EPA also routinely missed its statutory deadline for making decisions.

We recommended that EPA and Energy develop policies and procedures for making small refinery exemption decisions, and more.

An image of a green biofuel gas pump fueling a vehicle.

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Highlights

What GAO Found

The U.S. Environmental Protection Agency (EPA) does not have assurance that its decisions about small refinery exemptions under the Renewable Fuel Standard (RFS) are based on valid information. In addition, EPA and the Department of Energy (DOE) do not have policies and procedures specifying how they are to consult about and make exemption decisions.

Information. Small refinery exemption decisions for compliance years 2019 through 2021 were based on an EPA conclusion that small refineries do not experience disproportionate economic hardship from the RFS. This conclusion relies on a potentially flawed assumption—that all parties pay and receive one price for the tradeable credits used to demonstrate compliance with the RFS. GAO found that EPA has not analyzed whether this assumption is valid. GAO's analysis showed that small refineries have paid more on average for compliance credits than large refineries. Without reassessing its conclusion, EPA does not have assurance that its small refinery exemption decisions are based on valid information.

Policies and procedures. EPA has generally documented its decisions. However, EPA has no policies or procedures for how it assesses petitions and makes exemption decisions. Similarly, DOE does not have policies or procedures for how it provides consultation to EPA. Administration of the program has been inconsistent, and the number of exemptions granted and denied has varied from year to year (see fig.). Consequently, agency decisions appear ad hoc, resulting in market uncertainty. This can harm small refineries and renewable fuel producers by undermining their ability to plan for infrastructure upgrades and renewable fuel demand.

Number of Small Refinery Exemptions Granted and Denied, 2013-2021

Number of Small Refinery Exemptions Granted and Denied, 2013-2021

EPA has routinely missed the 90-day statutory deadline for issuing exemption decisions and does not have procedures to ensure that it meets these deadlines. In 5 of the 9 years GAO analyzed, EPA took more than 200 days to issue a decision for more than half of the petitions submitted. These late decisions diminish the benefit of exemptions, create market uncertainty, discourage investment, and undermine the design of the RFS more broadly.

Why GAO Did This Study

The RFS requires that gasoline and diesel fuels be blended with a minimum volume of renewable fuel. Small refineries can petition EPA annually for an exemption from their RFS obligations based on disproportionate economic hardship. EPA must evaluate small refinery exemption petitions in consultation with DOE.

GAO was asked to review issues related to EPA's and DOE's implementation of the small refinery exemption program. This report examines (1) information, policies, and procedures EPA and DOE use to make decisions about exemptions; and (2) the extent to which exemption decisions are timely. GAO analyzed data and documents related to exemptions from 2013 through 2021 and interviewed agency officials and industry stakeholders.

Recommendations

GAO is making seven recommendations, including that EPA reassess its conclusion that all small refineries recover their RFS compliance costs in the price of the gasoline and diesel they sell, DOE and EPA develop documented policies and procedures for making small refinery exemption decisions, and EPA develop procedures to ensure that it meets deadlines.

DOE agreed with GAO's recommendations. EPA disagreed with one recommendation and partially agreed with the others. GAO maintains that the recommendations are valid, as discussed in the report.

Recommendations for Executive Action

Agency Affected Recommendation Status
Environmental Protection Agency The Administrator of EPA should reassess EPA's conclusion that all small refineries recover their RFS compliance costs in the price of the gasoline and diesel they sell, including by fully examining and documenting RIN market performance and RIN pass-through in all relevant fuel markets. (Recommendation 1)
Open
EPA did not concur with this recommendation. We continue to believe that the recommendation is valid because both our work and EPA's preliminary results from its latest analysis point to a difference in the prices paid by small and larger refineries for RINs. Both our analysis and EPA's preliminary analysis also look at average differences in prices paid by smaller companies. Without additional analysis, it is not possible to know if there could be specific market situations or specific small refineries where these differences are more pronounced. Moreover, EPA's preliminary analysis does not attempt to determine at what level these differences may represent disproportionate economic hardship for a small refinery. We therefore maintain that it is important for EPA to fully analyze this difference and its potential causes. This is important both to inform EPA's overall approach to small refinery exemptions and its decision-making regarding specific exemption petitions. We will monitor EPA's efforts to address this recommendation.
Department of Energy The Secretary of Energy should develop an approach for consulting on small refinery exemption petitions that provides EPA with useful information on disproportionate economic hardship. (Recommendation 2)
Open
DOE concurred with this recommendation and said it would take steps to implement it. When we confirm what actions DOE has taken in response to this recommendation, we will provide updated information.
Environmental Protection Agency The Administrator of EPA should identify and communicate what information refineries would need to submit to demonstrate disproportionate economic hardship. (Recommendation 3)
Open
EPA partially concurred with this recommendation and said it would take steps to implement it. When we confirm what actions EPA has taken in response to this recommendation, we will provide updated information.
Department of Energy The Secretary of Energy should develop policies and procedures for its consultation with EPA on small refinery exemption petitions. (Recommendation 4)
Open
DOE concurred with this recommendation and said it would take steps to implement it. When we confirm what actions DOE has taken in response to this recommendation, we will provide updated information.
Environmental Protection Agency The Administrator of EPA should develop policies and procedures for making small refinery exemption decisions. (Recommendation 5)
Open
EPA partially concurred with this recommendation and said it would take steps to implement it. When we confirm what actions EPA has taken in response to this recommendation, we will provide updated information.
Environmental Protection Agency The Administrator of EPA should develop policies and procedures to ensure that EPA meets statutory deadlines to issue decisions, including tracking when petitions are considered complete. (Recommendation 6)
Open
EPA partially concurred with this recommendation and said it would take steps to implement it. When we confirm what actions EPA has taken in response to this recommendation, we will provide updated information.
Environmental Protection Agency The Administrator of EPA should assess the effect of small refinery exemption decision timing on the benefit provided to small refineries, as well as the effect on fuel markets, and reconsider petition requirements, such as that of three quarters of current year financial information. (Recommendation 7)
Open
EPA partially concurred with this recommendation and suggested that its new formulation of the annual volume requirements, in which EPA projects the gallons exempted for small refineries when setting the requirements, will reduce the volatility created by the timing of its decisions. However, EPA has projected that there will be zero exemptions. Therefore, this formulation will have no benefit if EPA does grant any exemptions. This recommendation also included reconsidering whether three quarters of financial information should be submitted with petitions. EPA described steps to update guidance on what refineries should submit, which may address this part of the recommendation. We will monitor EPA's efforts to address this recommendation.

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Agency evaluationsEconomic volatilityEnergy informationEnvironmental protectionInternal controlsOil refineriesPetroleum productsPolicies and proceduresFuelsGasoline