Oil Refiners Win Easier Biofuel Waivers at Supreme Court

(Bloomberg) -- The EPA has wide latitude to exempt refineries from federal mandates that they mix renewable fuels into gasoline and diesel, the U.S. Supreme Court ruled Friday, a victory for oil companies seeking a break from the requirements.

In a 6-3 decision, the justices rejected arguments that the Environmental Protection Agency’s exemption power is limited to only a handful of refineries that have received uninterrupted annual waivers from the Renewable Fuel Standard.

Writing for the majority, Justice Neil Gorsuch said that nothing in the Renewable Fuel Standard law itself “commands a continuity requirement.”

Under President Joe Biden, the EPA is expected to issue fewer waivers and force more refineries to satisfy annual biofuel quotas by either blending plant-based alternatives into their products or buying compliance credits from other companies that have. However, the Supreme Court precedent will give future administrations wide clearance to exempt oil refineries from annual blending quotas.

It also provides the Biden administration with more options for addressing concerns by some lawmakers and industry officials that climbing compliance costs imperil some independent refiners, particularly in the Northeast U.S. Several governors and non-integrated refineries, including PBF Energy Inc., and Delta Air Lines Inc.’s Monroe Energy LLC, have urged EPA to lower quotas.

Several refiners rose on the ruling, while biofuel makers sank. The S&P Oil & Gas Exploration and Production Select Industry Index was up 1.6% after rising as much as 1.8%. Among the top movers on the index was PBF Energy Inc., which jumped as much as 9.9% and was up 2.2% to $16.49 at 11:08 a.m. in New York trading. HollyFrontier Corp. climbed as much as 3.4% and was up 1.3% to $34.11. CVR Energy Inc. rose as much as 5.4% and was up 4% to $19.81.

Biofuel maker Darling Ingredients Inc. dropped as much as 9.9% before recovering some of its losses. It was down 3.1% to $63.15, while Renewable Energy Group Inc. was down 6.7% to $60.03 after dropping as much as 7.7%. Soybean oil, the commodity used to make biomass-based diesel dropped almost 6% in Chicago while corn used in U.S. ethanol fell as much as 3%.

Under the Renewable Fuel Standard law, Congress authorized EPA exemptions for small refineries that face an “economic hardship” in complying. Refineries that win exemptions can save tens to hundreds of millions dollars annually that they might otherwise spend buying biofuel compliance credits.

The waivers had surged under former President Donald Trump, provoking a backlash from biofuel advocates who argued Congress only intended the exemptions to be short-term relief, helping funnel refiners into compliance with the blending requirements over time. Refiners, by contrast, have argued Congress intended the waivers to serve as an essential safety valve, helping insulate a critical domestic industry from spiking compliance costs.

In his opinion for the court, Gorsuch the lack of clarity from the Renewable Fuel Standard law on the matter. “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,” he wrote.

The case turned on the justices’ interpretation of just a few words in the Renewable Fuel Standard law -- specifically its provision allowing a small refinery to petition the EPA “at any time” for an “extension” of its initial, automatic exemption. Biofuel producers unsuccessfully argued the law’s use of the word “extension” inherently meant refineries can only qualify if they have an existing exemption to prolong.

In a dissent, Justice Amy Coney Barrett argued the most natural reading of “extension” is as a continuation -- whether the matter is a tourist extending a hotel stay, a newspaper reader extending a subscription or a refinery seeking an extension of a biofuel waiver.

But Gorsuch wrote it was “entirely natural -- and consistent with ordinary usage -- to seek an ‘extension’ of time even after some lapse,” much as a forgetful student might seek “an extension for a term paper after the deadline has passed.”

Gorsuch was joined by Chief Justice John Roberts and Justices Clarence Thomas, Stephen Breyer, Samuel Alito and Brett Kavanaugh in ruling for refiners. Justices Sonia Sotomayor and Elena Kagan joined Barrett in dissent.

Biofuel makers blasted the decision and called on the EPA to limit exemptions anyway.

“Today’s decision allows refiners to request an RFS exemption extension, but it does not make it easier for refiners to actually receive one,” said Monte Shaw, executive director of the Iowa Renewable Fuels Association. “We fully expect the Biden EPA to keep their commitment to the RFS” and “deny the vast majority of RFS exemption extension requests that are pending or that will be submitted in the future.”

The coalition of biofuel allies that challenged the EPA waivers said they hoped the EPA’s new leadership would “take a far more judicious and responsible approach to the refinery exemption program than their predecessors did.”

Refiners celebrated the ruling, asserting the EPA should liberally use its validated waiver power to exempt refineries.

“As refiners both large and small face all time high renewable identification number costs and are recovering from the economic impacts of Covid-19, we urge EPA to immediately take action to make the RFS a workable program for U.S. refiners and consumers,” HollyFrontier said in an emailed statement.

Chet Thompson, president of the American Fuel and Petrochemical Manufacturers Association, said he hoped the EPA would now move swiftly “to provide critical relief to those small refineries that have demonstrated disproportionate economic harm resulting from the RFS.”

The EPA, which is now drafting a proposed slate of biofuel-blending quotas for 2021 and 2022, said it was analyzing the opinion.

“We understand this decision has implications for our current ongoing Renewable Fuel Standard rulemaking activities and petitions from small refineries currently pending before the agency,” EPA spokesman Nick Conger said by email. “The agency will follow the law and base our decisions on sound science while ensuring transparency.”

The dispute at the Supreme Court arose after the Renewable Fuels Association and other biofuel supporters challenged three waivers the EPA issued to refineries owned by HollyFrontier and CVR Energy’s Wynnewood Refining Co. In January 2020, the 10th U.S. Circuit Court of Appeals sided with the challengers, saying the EPA had exceeded its authority. The refineries appealed to the Supreme Court, and the federal government, under Biden, switched sides to favor the biofuel supporters.

The high court heard oral arguments in April.

The case is HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association, 20-472.

(Updates with reaction and ruling details, from 11th paragraph.)

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