The US Environmental Protection Agency proposed redistributing 100 percent of outstanding small refinery biofuel exemption volumes back into the annual Renewable Fuel Standard blending pool, according to a notice circulated this week.

The rule would retire a backlog of petitions that accumulated across more than a decade of litigation, agency filings show, and would reapply the corresponding gallons to covered parties' annual percentage standards rather than leaving them waived.

What did EPA propose?

EPA's draft would reallocate 100 percent of the biofuel volumes represented by approved small refinery exemptions, not the partial restoration pattern the agency used in prior rulemakings. The proposal treats every waived gallon as obligated volume that must be absorbed by the rest of the refining and blending pool.

The shift matters for obligated parties, who calculate RFS obligations on a percentage-of-gasoline-and-diesel basis. Removing exempted gallons from the pool reduces the denominator, lifting each non-exempt party's required share. The arithmetic runs the other direction for exempt refiners, who lose the volume shelter that smaller-margin operations have used to manage compliance costs.

The agency has not yet published specific volume estimates in the circulated notice, a gap trading desks flagged as the next data point to watch.

How did the exemption backlog accumulate?

The small refinery exemption program, written into the Energy Policy Act of 2005, lets refineries processing fewer than 75,000 barrels per day petition out of RFS obligations on hardship grounds. EPA granted a wave of petitions from 2016 through 2019, a period during which the agency issued more than 80 hardship findings. That count approaches one approved exemption for roughly every other small refinery in operation today.

The Tenth Circuit Court of Appeals invalidated many of those grants in HollyFrontier v. EPA, a 2020 decision that returned the program to a stricter statutory reading. EPA under the Biden administration denied most subsequent petitions and began reallocating the associated volumes by rule in 2022 and 2023.

That policy split created a record in which some exempted gallons were redistributed and others sat in regulatory limbo, depending on the year in question. The new proposal would close that gap.

What changes for obligated parties and blenders?

Reallocation flows downstream.

Larger refiners, integrated blenders, and renewable identification number traders take on additional volume obligations when exempt gallons re-enter the pool. RIN prices, the tradeable compliance certificates used to demonstrate RFS compliance, typically respond to perceived supply tightness, and analysts at commodity desks watch reallocation announcements for that reason.

The rule would also reset baseline assumptions for the 2026 compliance year. Parties that priced 2025 obligations against a partial-reallocation scenario would face a higher percentage standard if EPA finalizes the full-redistribution approach.

What happens next?

The proposal opens a public comment period under the standard Clean Air Act rulemaking timetable, after which EPA must address received comments before issuing a final rule. Court challenges are likely from refiners whose hardship findings the rule would unwind, a pattern that has shadowed every recent SRE action.

For the recycling and waste sector, the connection runs through rendered animal fats, used cooking oil, and distillers corn oil, feedstocks that count toward biomass-based diesel and renewable diesel volumes under the RFS. Higher obligations lift demand-side pull on those streams, which already trade at premium prices to fossil diesel.

The market milestone to track: the comment period closure date, which sets the procedural clock for any final rule and any subsequent litigation.