EPA has proposed to take a positive and meaningful step to help prevent future small refinery exemptions (SREs) under the Renewable Fuel Standard (RFS) from causing demand destruction that harms the ethanol industry and farmers.
The Agency’s proposal is part of their so-called “Set 2” rulemaking to establish RFS blending volumes for the 2026 and 2027 compliance years, and it is expected to be finalized around the end of 2025 or beginning of 2026.
To set the stage for this, in August of 2025, EPA took action on a backlog of pending SREs, including decisions to grant several full and partial SREs for the 2023 and 2024 RFS compliance years. The Agency essentially exempted significant volumes of gasoline and diesel from RFS compliance in 2023 and 2024 and increased the supply of Renewable Identification Number (RIN) credits. Had EPA merely taken that action, it would have been very harmful to the renewable fuels industry and agriculture. Thankfully, EPA followed up by proposing to rectify and reallocate the impacts of the SREs it granted for the 2023 and 2024 RFS compliance years, as well as reallocation for SREs anticipated for 2025.
Why does reallocation of waived volumes under the RFS matter? Because if the volumes of renewable fuel represented by the SREs are not reallocated to non-exempt refiners, obligated parties can use the resulting oversupply of low-priced RINs to satisfy the 2026 and 2027 RFS blending targets instead of blending physical gallons of ethanol and other renewable fuel.
Unfortunately, this problem arose during the first Trump administration. Following decisions by EPA to allow an unprecedented number of SREs in 2017, RIN values began to collapse and fell to artificially low levels in 2018 and 2019. The resulting low RIN prices discouraged refiners from blending ethanol above E10, artificially restraining sales of E15, E30, and E85. This was demand destruction.
Thankfully, after numerous court battles and some reflection on the part of administration officials, EPA understands the harm they previously caused. The Agency has now proposed a way to prevent demand destruction by ensuring reallocation of gallons refineries should have legally blended during the last three RFS compliance years.
ACE has urged EPA to ensure full and complete reallocation for 2026 and 2027. In other words, we have encouraged the Agency to reallocate 100% of the 2023 through 2025 exempted blending targets – an estimated 2.18 billion gallons – to the final Set 2 rule. The 100% full reallocation approach is the only way to ensure blending obligations will remain whole under the RFS.
Going forward, we have praised EPA for indicating it will prospectively account for and reallocate SREs in future RFS blending targets, meaning demand destruction under the RFS from SREs should be a thing of the past.