U.S. Fifth Circuit Reverses EPA’s Denial of Fuel Program Hardship Exemption for Refineries
In Calumet Shreveport Refining LLC v. EPA, Case No. 22-60266 (5th Cir. Nov. 22, 2023), the U.S. Court of Appeals for the Fifth Circuit struck down Environmental Protection Agency (EPA) denials of six small refineries’ petitions for hardship relief under the Clean Air Act Renewable Fuel Standard (RFS) program, holding that EPA used an “impermissibly retroactive” standard to deny the refineries’ petitions in violation of the Administrative Procedure Act. This ruling could serve as a basis for other refineries to challenge EPA’s retroactive denial of their hardship petitions — and provides support for similar petitions pending before the U.S. Court of Appeals for the D.C. Circuit.
Background. In 2005, Congress amended the Clean Air Act to establish the RFS program, which specifies increasing annual national volume targets for four categories of renewable fuel for the transportation sector: total renewable fuel, advanced biofuel, cellulosic biofuel, and biomass-based diesel. The RFS obligations apply to gas and diesel fuel importers and refiners, who can fulfill their obligations by blending more renewable fuels into their products and/or purchasing credits from other refiners and importers that blend more than the required amounts. The credits generated by blending fuel and traded among refineries are called renewable identification numbers (RINs).
Small refineries can petition EPA to exempt them from the RFS obligations if the refineries can demonstrate that such obligations would impose “disproportionate economic hardship” on them. In 2022, EPA retroactively denied 36 refineries’ petitions for hardship exemptions to RFS obligations for 2016 through 2021. Refineries appealed EPA’s denial in different courts of appeal: The Third, Seventh, and Tenth circuits transferred appeals to the D.C. Circuit, while the Ninth Circuit dismissed the case. The Fifth Circuit, however, elected to keep the case filed there, denying EPA’s motion to transfer to the D.C. Circuit. The Eleventh Circuit has retained a similar case, although that court has not yet ruled on EPA’s request to transfer the case to D.C.
Ruling. The Fifth Circuit court held that (i) venue was proper, (ii) EPA’s denials of the exemption (the Denial Actions) were impermissibly retroactive, (iii) EPA acted contrary to the statute, and (iv) the evidence did not support RIN cost passthrough. As a result, the court vacated the Denial Actions.
Venue. The court rejected EPA’s argument that the Denial Actions are “nationally applicable” actions that belong in the D.C. Circuit because they “apply a consistent statutory interpretation and economic analysis to small refineries nationwide.” Rather, the majority held that national applicability is measured by the legal effect of an agency action. By this measure, the legal effect of EPA’s denials was local in nature, confined to the refineries in question, and nonprecedential to future agency determinations and therefore did not have national applicability.
Retroactivity. Finding venue proper, the Fifth Circuit vacated and remanded EPA’s denial of the six refineries’ RFS hardship exemptions, ruling that EPA’s action was “impermissibly retroactive” and contrary to law, violating the Administrative Procedure Act. The court found that the refineries had “justifiably relied” in good faith on EPA’s past practice when applying for hardship exemptions and that EPA gave insufficient notice of its intention to depart from a decadelong practice and apply new interpretations of the Clean Air Act to exemption determinations. In judging EPA’s retroactive rejection of the refineries’ hardship petitions, the court applied a balancing testing between the “ills of retroactivity” and the “disadvantages of prospectivity,” finding the retroactive application conferred “no legitimate benefit” to EPA and “harshly penalize[d]” the small refineries.
Disproportionate economic hardship. EPA had previously decided whether to grant hardship petitions based on a statutorily mandated 2011 Department of Energy study and scoring matrix. EPA’s new approach would grant an exemption to small refineries only if their economic hardship was caused solely by RFS compliance costs. The Fifth Circuit rejected EPA’s new interpretation, holding the “disproportionate economic hardship” required to qualify for the exemption is broader than just RFS compliance costs and could include factors such as local economic conditions or refinery-specific circumstances. The court cited Congress’ mandate to EPA to consider “other economic factors” in deciding exemption requests.
RIN cost passthrough. In retroactively denying hardship petitions, EPA also put forth a “RIN cost passthrough” theory, positing that (1) the cost of RINs is the same for all obligated parties, whether acquired by blending fuels or purchasing RINs from other refineries, and (2) the costs of RIN acquisition are passed through in the prices of refined products. The Fifth Circuit agreed with the petitioners that it was arbitrary and capricious for EPA to rely on RIN cost passthrough because it ignored petitioners’ data on inefficient local markets (i.e., showing that refineries cannot always timely acquire RINs for fair market rates).
Impact of Ruling. It is not yet known how EPA will respond to this decision, but other small refineries could seek to rely on aspects of the Fifth Circuit’s rationale to support their hardship exemption petitions — including the petitions now pending in the D.C. and Eleventh Circuits. Depending on how the D.C. and Eleventh Circuits rule in the cases before those courts, the RFS program could once again end up in front of the U.S. Supreme Court.
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