The US Environmental Protection Agency (EPA) has released a Supplemental Notice of Proposed Rulemaking signed by Administrator Lee Zeldin, addressing the Renewable Fuel Standard (RFS) program standards for 2026 and 2027, and a partial waiver for the 2025 Cellulosic Biofuel Volume Requirement. This proposal aims to integrate recent decisions on Small Refinery Exemptions (SREs) into future RFS volumes and provide more detailed projections for these years.
This supplemental proposal directly considers the anticipated effects of the EPA's 22 August decisions on 175 small refinery exemption (SRE) petitions. These decisions exempted 11.4 billion gallons of gasoline and diesel for the 2023 and 2024 compliance years, which means 1.4 billion Renewable Identification Numbers (RINs) are no longer needed for retirement for those years. The EPA also projects an additional 780 million RINs will be exempted for the 2025 compliance year, bringing the total projected exempted RINs for 2023-2025 to 2.18 billion.
Further, to prevent these newly available RINs from potentially depressing RIN prices and reducing demand for renewable fuel in 2026 and 2027, the EPA is co-proposing additional volumes, termed "SRE reallocation volumes," for 2026 and 2027. These reallocations represent either 100 percent or 50 percent of the 2023-2025 exempted Renewable Volume Obligations (RVOs). The EPA is also requesting public comments on other reallocation amounts, explicitly stating 25%, 75%, or even no reallocation at all. The intent of these reallocation volumes is to prevent the increase in carryover 2025 RINs from reducing demand for renewable fuel below the volumes originally proposed for 2026 and 2027.
For 2023 and 2024, exempted gasoline and diesel volumes were calculated using data from SRE petitions and EPA’s Moderated Transaction System (EMTS). For 2025, the EPA shifted to a projection approach, averaging exempted volumes from 2022 through 2024 to smooth out year-specific anomalies and provide a more stable forecast. Based on this method, the EPA projects that 5.95 billion gallons of gasoline and diesel will be exempted in 2025. Below is the breakdown of exempted fuel volumes:
The EPA’s revised proposal includes updated percentage standards for 2026 and 2027, reflecting both the proposed SRE reallocation volumes and a newly informed, lower projection of exempted gasoline and diesel volumes, now estimated at 5.95 billion gallons per year. This represents a substantial reduction from the upper-bound estimate of 18 billion gallons in the prior “Set 2 proposal.” The revised percentage standards are calculated by combining the annual Renewable Fuel Volume (RFV) requirement with the SRE reallocation volume (SRERV) in the numerator, while accounting for the projected exempted volumes in the denominator.
Although the revised standards include pre-empted SRE reallocation volumes that are actually lower than those in the 17 June’s “Set 2 proposal,” primarily due to the significantly lower exempted volume projections for 2026 and 2027. As a result, the EPA now projects smaller impacts on retail fuel prices. Gasoline prices are expected to increase by 3.8¢–4.4¢ per gallon, down from the prior estimate of 4.4–4.7¢, while diesel prices are projected to rise 8.5¢–10.3¢ per gallon, compared with 9.1¢–10.6¢ previously, depending on the reallocation approach.
All comments must be submitted by 31 October. Comments should be filed online using Docket ID No. EPA-HQ-OAR-2024-0505 at www.regulations.gov. The EPA will hold a virtual public hearing on 1 October, at 9am (EST). All attendees should register for the hearing by 24 September.
The EPA’s adjustments to the 2026 and 2027 RVOs to integrate the reallocation of exempted volumes from 2023 to 2025 appear broadly bullish. However, with EPA also considering scenarios where only 50 percent of volumes are reallocated or no reallocation occurs at all, participants are likely to remain cautious and sentiment muted.
Market reaction reflected that hesitation. Soybean oil rose 1.81 percent to 53.19 cents per pound, but the move was largely offset by a 2.66 percent increase in heating oil, leaving the BO-HO spread at similar levels to previous days. The muted spread response suggests traders are waiting for final rule clarity before committing to stronger positions.
ClearBlue estimates that under a 100 percent reallocation scenario, and assuming obligated parties bank enough credits to offset excess RINs from 2023 and 2024 exempted volumes, the market would enter the 2026 compliance year short by 833 million RINs if biomass-based diesel producers maintain July run-rates and export levels observed from January through July. A 50 percent reallocation would leave a surplus of 257 million RINs, well below the maximum carry-over allowance of 4.9 billion RINs against total 2026 obligations expected to exceed 24.5 billion RINs if gasoline and diesel demand holds near 2024 levels. With no reallocation, the market could enter 2026 with a surplus of about 1.3 billion RINs.
We estimate that to meet required 2025 obligations under a 100 percent reallocation, biomass-based diesel run-rates would need to rise above 80 percent from July’s 69 percent, with minimal exports for the remainder of the year. By contrast, under a no reallocation scenario, producers could run at just 35 percent and still enter 2026 with no shortfall, underscoring how reallocation outcomes could materially shift balance dynamics, alter soybean oil demand, and drive RIN price direction.
Overall, the development is constructive given the consideration of full reallocation, but until the rules are finalized RIN prices are likely to hover near USD 1 per credit, even though we lean bullish. In the near term, the market may continue to see minimal D4 versus D6 spreads, with no announced changes to the proposed 2026 and 2027 conventional RVOs. Further, political uncertainty, such as pending legislation that could restrict SRE reallocation, adds another layer of risk and is likely to keep obligated parties in a cautious lane until the framework is finalized.
ClearBlue will continue to monitor developments and update clients.