Friday the 13th: The RFS Chapter

On Friday, June 13, 2025, the U.S. Environmental Protection Agency (EPA) released their proposed “Set 2” rule. This is the first step in the process of setting the Renewable Fuel Standard (RFS) renewable volume obligations (RVOs) for 2026 and 2027. In this article, we explore what is contained in the proposed rule, discuss how the proposed changes interact with the Clean Fuels Production Credit (45Z) and state low-carbon fuel (LCF) programs, and outline the next steps in the process to finalize the RVOs. (Importantly, while the RVOs are getting the headlines, proposed changes in the calculation of equivalence values are likely to be the most impactful element in this proposal. More on that below.) In a forthcoming article we will take the next step and address questions around how Set 2, if implemented as proposed, would impact supply, demand, and global trade in biomass-based diesel (BBD) and feedstocks.

Before we dive deeper into the weeds, do you need a primer on how the RFS works? Read our RFS 101.

 

What is Proposed?

The most prominent feature in the Set 2 proposal is setting the RVOs for each of the four RFS fuel categories for 2026 and 2027 as required by statute.[1] In addition to these required rulemakings, EPA chose (as it often does) to use this publication to propose a partial waiver of the 2025 cellulosic biofuels RVO and to propose several other changes to the RFS regulations.

Cellulosic Biofuels (CB) – In the wake of having issued a partial waiver of the 2024 CB standard (due to the market being unable to achieve the mandated level of CB usage), EPA used this rulemaking to issue a partial waiver of the 2025 CB RVO which had been finalized at 1.38 billion renewable identification numbers (RINs) in the Set 1 Rule for 2023, 2024, and 2025. In granting this waiver, EPA recognized that CB usage (approximately 99% of which is renewable natural gas, RNG) is inherently limited by the amount of fuel required by the small and slowly growing U.S. natural gas vehicle (NGV) fleet.[2] Accordingly, EPA estimated the total annual fuel demand for the NGV fleet in 2025 and assumed that a maximum of 97% of that could be met with RNG (as has been the case for the last several years in California and, more recently, for the U.S. as a whole). EPA also included an estimate of corn kernel fiber (CKF) ethanol production which makes up the balance of CB demand in the U.S. Finally, EPA used this same approach in proposing the CB volume standards for 2026 and 2027.

Biomass-Based Diesel (BBD) – In the Set 2 rule, EPA recognized rapid recent growth and projected future growth for this category with a detailed analysis of potential supply of biodiesel (BD) and renewable diesel (RD) and the feedstocks required for that production. EPA also departed from prior practice by setting this standard in terms of RINs rather than physical gallons due to proposed changes to the equivalence values for certain fuels (described below). This change in equivalence values makes it difficult to compare the physical volumes of BBD required to those blended in prior years as that will be highly dependent upon the mix of fuels used to satisfy this obligation.

Conventional Biofuels – In proposing volume standards for 2026 and 2027, EPA followed their recent practice of estimating total ethanol demand (i.e., E10, E15, and E85 blends) at about 14 billion gallons per year (bgy) and then subtracting CKF ethanol and a small projected volume of other Advanced ethanol (e.g., sugarcane, sorghum, etc.) to estimate corn ethanol demand. This volume is forecast to slowly decrease in coming years in proportion to declining gasoline demand. EPA then proposes the implied Conventional Biofuels standard at 15 bgy in both 2026 and 2027 with an assumption that a portion of this will be met with BBD blended in excess of the BBD and total non-cellulosic Advanced Biofuels (AB) standard.

Summary of Proposed Volume StandardsSource: FR-2025-11128, June 17, 2025 

Equivalence Values – EPA proposed certain changes in the equivalence values assigned to RD and certain co-products. Additionally, EPA proposed that the equivalence values assigned to all fuels which are either imported or produced from imported feedstocks be reduced by 50%.

• In the case of RD, renewable jet (RJ), and renewable naphtha (RN), EPA proposed to reduce the currently assigned equivalence values to account for the predominant use of fossil-derived hydrogen in the production of these fuels (analogous to the treatment of fossil-derived methanol in the production of BD). Currently, RD pathways have equivalence values of 1.6 or 1.7 depending on the producer; in the Set 2 rule, EPA proposed to fix all RD pathways at 1.6. Similarly, RN equivalence values are currently 1.4 or 1.5, and EPA proposed to fix all RN to 1.4; RJ equivalence values are currently 1.6 or 1.7, and EPA proposed to fix all RJ to 1.6.
• For all renewable fuels imported or produced from imported feedstocks, EPA proposed a 50% reduction in equivalence value from what would otherwise be assigned to the production pathway on a technical basis. EPA explained this is an effort to reward the energy independence and energy security benefits ascribed to domestic fuel and feedstock production. Implementing this proposed change requires changes to current reporting and recordkeeping requirements in order to appropriately track imported fuels and feedstocks.

The impacts of these proposed changes to equivalence values are anticipated to primarily occur in the BBD category as this is where imported fuels and feedstocks are most prevalent. Because the mix of domestic and foreign-derived fuels cannot be accurately forecast, EPA has shifted to expressing the proposed BBD volume obligation in RINs rather than physical gallons. All of the proposed equivalence value changes can be expected to lower the average equivalence value of the mix of fuels used to satisfy the BBD obligation. As that obligation is set in RIN units, a lower equivalence value means that more physical gallons will be required. This can be expected to result in increased RIN prices.

Removal of Renewable Electricity – In the Set 2 rule, EPA proposed to remove definitions and pathways associated with renewable electricity currently in the RFS regulations. The statutory language establishing the RFS did not specifically mention electricity but was intentionally broad in including all fuels produced from renewable biomass which are used to displace fossil fuels in transportation vehicles and engines. In crafting the regulations implementing the RFS2 program, EPA added a definition of renewable electricity (essentially, any electricity produced from renewable biomass with a minimum 20% greenhouse gas reduction versus baseline). In 2014, EPA created two general pathways for renewable electricity used to power electric vehicles. However, no applicants were ever able to satisfy EPA’s requirements for a robust and verifiable linkage between electricity generation and usage in an electric vehicle. Accordingly, no one has ever secured registration for the generation of RINs for renewable electricity (eRINs). In proposing the Set 1 rule, the previous EPA administration aimed to address this issue by creating a structure linking biogas producers, power generators, and original equipment manufacturers and assuming that the associated power generation was used in electric vehicles. This proposal received numerous objections during the public comment period and was dropped from the final rule. While the current proposal, if finalized, would have no immediate market impact, the arguments put forth in this proposal will have the effect of raising the bar for any future EPA administrations seeking to approve renewable electricity for RIN generation.

Other Items – The current proposal also includes several other more technical corrections and refinements.

 

What are the interactions with 45Z and state LCF programs?

Mismatch with 45Z – We have recently written about proposed changes to the 45Z tax credit contained in the reconciliation bill currently in Congress (The 45Z Tax Credit Gets a “Big Beautiful” Alteration). Assuming that this bill is enacted in its current form, it will make all fuels produced from imported feedstocks (except any imported from Canada or Mexico) ineligible for the tax credit.[3] The most important mismatch this creates is that BBD produced in the U.S. from Canadian canola oil will be eligible for the full 45Z tax credit but will have its equivalence value halved. This will create a recordkeeping burden for BBD producers who process a mix of U.S.- and Canadian-sourced canola oil.

Mismatch with state LCF programs – The restrictions on imported fuels and feedstocks being proposed in the Set 2 rule are designed to encourage greater use of domestic soybean and canola oil as feedstocks. However, state LCF programs assign these feedstocks higher (less desirable) carbon intensities (CIs) than waste feedstocks (e.g., used cooking oil and inedible tallow regardless of country of origin). Directionally, the proposed RFS changes can be expected to increase the CI and decrease the overall availability of BBD while state LCF programs need increasing volumes of low-CI BBD each year in order to meet their progressive CI-reduction requirements. This can be expected to generally result in increased LCF credit prices and may require states to scale back their requirements in order to keep their programs feasible.

 

What comes next?

With the publication of these proposed regulations, EPA is now required to accept public input on these proposals. This will be done in the form of a virtual public hearing to be held on July 8, 2025 and, if necessary, July 9 (see EPA’s meeting notice for details) and via written comments (submit to regulations.gov, docket [EPA-HQ-OAR-2024-0505; FRL-11947-01-OAR] no later than August 8, 2025.) EPA is required to review and consider all relevant comments in formulating a final rule. EPA has indicated a goal of publishing the final rule by the statutory deadline of October 31, 2025. The proposed regulations do not take effect until the final rule is published in the Federal Register.

If you are looking for further information on the proposed regulations and how they might impact your business, don’t run under a ladder and don’t ask a black cat, contact us!