Using the Supreme Court's Enigmatic Commerce Clause Holding in Sebelius to Challenge Congress's Broken Renewable Fuel Standard

68 Am. U. L. Rev. 667 (2018).

* Senior Staff, American University Law Review, Volume 68; J.D. Candidate, May 2019, American University Washington College of Law; B.A., Economics, 2010, The George Washington University. I would like to thank Professor William J. Snape, III for his guidance and insight; the American University Law Review staff for their tireless work and invaluable contributions; and Professor Elizabeth Earle Beske for her support and encouragement. I would also like to dedicate this Comment to my grandfather, H. Thomas Summers, whose passion for knowledge remains an inspiration and suggests that the secret to longevity and happiness is to never stop questioning.

At the intersection of energy law, environmental law, and interstate commerce lies a complex piece of legislation called the Renewable Fuel Standard (RFS). Aimed at increasing energy efficiency and supporting alternative fuel sources, the RFS requires that oil producers and importers offset their carbon footprints by obtaining and retiring compliance credits called Renewable Identification Numbers (RINs). However, for major oil refiners, the financial burdens of this compliance system distribute unevenly. Refiners that blend oil components into gasoline and diesel generate RINs as a byproduct of their business model, mitigating their compliance costs. On the other hand, independent refiners that do not blend oil components into fuel must purchase RINs in a secondary market, often resulting in massive compliance costs.

Because the RFS and its RINs compliance regime impact some refiners more than others, it has remained hotly debated since its expansion in 2007. This RFS controversy arguably peaked in January 2018, when one of the largest oil refiners in the United States, Philadelphia Energy Solutions, filed for bankruptcy, citing RFS compliance costs as the root cause of its financial difficulties. Industry backlash was swift enough that in October 2018, the Trump Administration announced that it had directed the Environmental Protection Agency, the executive agency charged with enforcing the RFS, to consider reforms aimed at increasing transparency and preventing price manipulation in the RINs market.

This Comment argues that the reforms suggested by the Trump Administration are insufficient to repair a compliance regime that is deeply flawed and beyond repair. Instead, refiners like Philadelphia Energy Solutions—the so-called “losers” in the RFS compliance regime—should look to challenge the RFS on constitutional grounds. Specifically, this Comment argues that refiners may challenge the RFS using Chief Justice John Roberts’s Commerce Clause holding from National Federation of Independent Business v. Sebelius, which stated that Congress may not compel market participation as an extension of its Commerce Clause power.

This Comment examines both the RFS and the unsettled legacy of Chief Justice Roberts’s Sebelius decision, arguing that the latter provides refiners like Philadelphia Energy Solutions with a unique constitutional challenge to a thoroughly broken piece of legislation.

“The EPA asserts that more E15 gasoline must be blended in order for producers to meet the RFS, true? . . . Let me ask you, do you think we are headed for a train wreck, as currently defined by Congress?”

— Representative Paul Gosar¹

“I am not aware of the definition of train wreck by the Congress.”

—Christopher Grundler,
Director, EPA Office of Transportation and Air Quality²

Introduction

In October 2011, federal agents raided the offices of a biofuels company called Absolute Fuels in Lubbock, Texas, leaving dozens of surprised members of the community without jobs.³ Amid local confusion, federal authorities carried out a series of similar raids on the private home and offices of Absolute Fuels’s Chief Executive Officer, Jeff Gunselman.⁴ In the resulting investigations, federal agents seized luxury cars, sports memorabilia, an anti-aircraft gun, a Gulfstream private jet, a flamethrower, and a decommissioned Patton military tank.⁵ Two years later, in March 2013, United States District Judge Sam R. Cummings sentenced Gunselman to 188 months in federal prison and ordered him to pay nearly $55 million in restitution.⁶

At nearly the same time as Gunselman’s sentencing, approximately 1800 miles away in White Plains, New York, trading firm OceanConnect, LLC filed for bankruptcy.⁷ Through the summer of 2012, the company spent months in and out of federal court defending itself from breach of contract claims filed by other trading houses and oil refining interests.⁸ OceanConnect lost most of these suits and failed in its attempts to indemnify itself by impleading various administrative agencies, such as the Environmental Protection Agency (EPA).⁹ In its filing for Chapter 7 bankruptcy protection, OceanConnect reported that it ended 2012 with a massive $1.7 million loss.¹⁰

But while both Gunselman and OceanConnect had a difficult 2013, they fared far better financially than major oil refiners, which suddenly faced some staggering new compliance costs. For some refiners, 2013 added hundreds of millions of dollars in operating expenditures, seemingly out of nowhere.¹¹ By August 2013, one major refiner faced a tab of an incredible $800 million.¹²

The unifying link in this energy industry triptych was a unique set of regulations called the Renewable Fuel Standard (“RFS”),¹³ a legislative behemoth enacted in 2005 when Congress passed the Energy Policy Act.¹⁴ Aimed at incentivizing the production and use of cleaner, more efficient transportation fuels, the RFS brought sweeping changes to the oil industry in the United States by imposing massive financial burdens on some industry players.¹⁵

Oddly enough, in the same cruel 2012 summer that felled Gunselman and OceanConnect and sowed the seeds of huge financial losses for oil refiners, the Supreme Court of the United States handed down a decision with huge consequences for another industry altogether. In a landmark ruling in National Federation of Independent Businesses v. Sebelius,¹⁶ the Supreme Court ruled that a portion of the Patient Protection and Affordable Care Act (ACA)¹⁷ called the “individual mandate”¹⁸ was an unconstitutional extension of Congress’s Commerce Clause power.¹⁹ Although the Court ultimately upheld the individual mandate as permissible use of Congress’s power to tax and spend,²⁰ the Court took issue with Congress using the Commerce Clause to force individuals to participate in the market for health insurance.²¹ In a powerful but mysterious opinion, Chief Justice John Roberts put a new wrinkle into Commerce Clause jurisprudence by stating plainly that while Congress may regulate interstate commerce under its Article I power, it may not compel market participation under the guise of regulation.²²

Following the Sebelius decision, both state and federal courts and legal scholars struggled to make sense of just what Chief Justice Roberts’s opinion²³ meant for the Commerce Clause.²⁴ Nearly six years since the decision, circuits remain split and the debate continues.²⁵

However, 2018 may have introduced a catalyst with the potential to unify the embattled RFS and the unsettled legacy of Sebelius. In January 2018, the RFS claimed a casualty that reached beyond local and industry news when Philadelphia Energy Solutions, the tenth-largest refinery in the United States, filed for bankruptcy.²⁶ In a sweeping indictment of the regulatory scheme, Philadelphia Energy Solutions attributed its dire financial straits to “skyrocketing” costs under the RFS compliance regime, calling the system “broken.”²⁷ Notably, the refiner reported that in 2017 it spent $218 million—twice what it spent on payroll—on meeting its compliance obligations.²⁸

As perhaps the first perfectly situated plaintiff, Philadelphia Energy Solutions can likely challenge the RFS using the rationale articulated in Chief Justice Roberts’s enigmatic Commerce Clause holding in Sebelius. This Comment argues that such a challenge carries the potential to remedy a thoroughly broken regulatory scheme and, in the process, provide the Supreme Court with an opportunity to bring clarity to its currently unsettled Commerce Clause jurisprudence.

Part I of this Comment details the origins of the RFS and summarizes the regulatory framework, including how its compliance credit-based enforcement scheme burdens obligated parties.²⁹ Part I also provides background on the Supreme Court’s Sebelius decision and briefly summarizes several intervening cases in which plaintiffs attempted to apply a post-Sebelius Commerce Clause challenge in other contexts.³⁰ Part I concludes with a brief overview of the legal deference courts give to administrative agency interpretations of statutory directives, a doctrine known as Chevron deference.³¹ Next, Part II describes how the RFS remains an unresolved problem in dire need of revision or repeal.³² After briefly distinguishing alternative methods of remedying the RFS problem, this Comment argues that because Chief Justice Roberts’s Commerce Clause holding in Sebelius is binding precedent, a prospective challenger may seek to invalidate the RFS as an unconstitutional compulsion of commercial activity.³³ Finally, this Comment concludes that, whereas alternative methods of revision fall short, challenging the RFS as an invalid extension of Congress’s Commerce Clause power represents a unique opportunity to both clean up a broken RFS and bring clarity to the Supreme Court’s constitutional jurisprudence in the wake of Sebelius.³⁴

I. Background

Comprehending the RFS and Sebelius individually, much less the two in unison, requires at least a basic outline of several fundamental concepts concerning the domestic oil industry, Congress’s attempts to regulate transportation fuels, the power delegated to Congress by Article I of the Constitution, and the deference owed to administrative agency rulemaking. While providing an exhaustive description of each category is far beyond the scope of this Comment, this Section nevertheless begins with a broad discussion of the issues necessary to understand the intersection of the RFS and modern Commerce Clause jurisprudence following the Supreme Court’s decision in Sebelius.

A. The Oil Industry: A Primer

Without context, the RFS is nothing but another complex set of regulations in a legislative universe chock full of confusing statutes. But beyond the technical gobbledygook, the RFS is an extremely influential piece of legislation with profound effects on the U.S. economy. Understanding its relevance requires first a brief discussion of the absolute basics of the oil industry and how petroleum refining fits into the domestic transportation sector.

1. The ongoing reign of fossil fuels

As of 2018, most of the energy consumed annually in the United States derives from fossil fuels.³⁵ While these fossil fuels supply key inputs for manufacturing and heating, they are most commonly associated with transportation.³⁶ Despite the growing popularity of electric, hybrid, and alternative-fuel vehicles,³⁷ approximately ninety-two percent of private and commercial vehicles still use petroleum as a fuel source.³⁸

The most common petroleum-based fuels used in the transportation sector are gasoline and diesel.³⁹ Both products derive from crude oil, a mixture of hydrocarbons in liquid form⁴⁰ that companies rip from the earth using various drilling, pumping, and extraction methods.⁴¹ Once pulled from the ground and delivered to refining facilities, oil refiners break the mixture of crude oil into separate batches of discrete compounds using a process called “fractional distillation.”⁴² During this process, refining instruments heat crude oil until the constituent compounds reach their individual boiling points.⁴³ Collected in a tiered structure called a distillation column,⁴⁴ these subsidiary products—which exhibit markedly different chemical characteristics⁴⁵—are then used in blending to create finished transportation fuels or utilized as feedstock for other industrial and manufacturing purposes.⁴⁶ The base forms of gasoline, collectively known as “blendstock,” are but a few of the products derived from this basic oil distillation process.⁴⁷

For gasoline, in particular, what comes directly from the refinery is not what ultimately fuels an automobile. Before motorists pump gasoline into their cars and trucks, marketers and suppliers mix gasoline blendstock sourced from refineries with ethanol⁴⁸ to reduce the resulting emissions.⁴⁹ Although the addition of ethanol slightly reduces the efficiency of gasoline,⁵⁰ ethanol-blended gasoline nevertheless now makes up approximately ninety-five percent of all the fuel used by motor vehicles with gasoline engines in the United States.⁵¹

While this basic explanation overlooks many nuances of the fuel chain and greatly oversimplifies the production scheme, a more thorough and detailed explanation is beyond the scope of this Comment. Still, it is important to keep in mind two important realities: (1) most of the transportation fuel used in the United States derives from petroleum, and (2) before gasoline reaches the tank, federal law mandates that intermediaries blend it with ethanol to reduce pollution. How and when fuel blending takes place is key to understanding how the RFS functions, requiring a brief explanation of the oil refining industry.

2. Oil refining and fuel blending

Both oil refining and the blending of petroleum products into finished transportation and heating fuel takes place in the “downstream” portion of an industry, generally split into three segments: upstream, midstream, and downstream.⁵²

The upstream segment includes the physical exploitation of petroleum resources, usually through oil exploration, drilling, and the actual removal of crude oil from the ground.⁵³ By comparison, crude oil and natural gas transportation via truck, barge, and pipeline generally characterizes the midstream sector.⁵⁴ However, most relevant to the RFS is the downstream sector, where the actual oil refining process takes place.⁵⁵

Unlike the upstream and midstream segments, the downstream sector is best understood as two distinct halves.⁵⁶ In what might be called the “upper” half of the downstream sector, companies utilize massive oil refining assets to convert physical crude oil and feedstock to petroleum products like gasoline blendstocks, diesel, blending components like naphtha, and even asphalt.⁵⁷ The second, “lower,” half of the downstream sector includes the blending, marketing, delivery, and terminal distribution of finished transportation fuel, heating fuel, and jet fuel.⁵⁸ While many of the largest oil companies maintain an asset presence in each segment of the industry,⁵⁹ the RFS is most impactful among refiners and blenders in the downstream segment, where the compliance burden falls. Here, the origins and innerworkings of the RFS become immediately relevant to understanding the financial footprint of this compliance burden.

B. The Renewable Fuel Standard

At its most basic, the RFS simply reflects Congress’s intent to incentivize the production and use of cleaner, more efficient fuels.⁶⁰ Like many statutes currently in force, the RFS evolved through amendment and revision.

1. Birth of the RFS: The Energy Policy Act and the Clean Air Act

In passing the Energy Policy Act of 2005, Congress supplemented the existing Clean Air Act⁶¹ by instituting a “renewable fuel program.”⁶² In its introduction, the Energy Policy Act evinced a shift in policy aimed at reducing the United States’ reliance on foreign energy,⁶³ increasing the efficiency of existing energy sources,⁶⁴ and supporting a push for a diversified fuel production.⁶⁵ Notably, the Energy Policy Act included a provision that set forth renewable fuel blending requirements⁶⁶ for petroleum refiners and importers⁶⁷ and established annual volume requirements⁶⁸ for qualifying renewable fuel types. For compliance purposes, the RFS⁶⁹ designated all refiners and importers as “obligated parties”⁷⁰ and required the blending of renewable fuels directly proportionate to petroleum production or importation.⁷¹

In 2007, Congress passed the Energy Independence and Security Act (EISA),⁷² which expanded the qualifying types of renewable fuels⁷³ and increased the blending obligations for petroleum refiners and importers.⁷⁴ The result was a second, modernized RFS that requires producers and importers to blend, as a means of compliance with regulatory targets, one or more of four statutorily recognized renewable fuels:⁷⁵ conventional renewable fuel (“D6”);⁷⁶ advanced biofuel (“D5”);⁷⁷ cellulosic biofuel (“D3”);⁷⁸ and biomass-based diesel (“D4”).⁷⁹

Most recently, reports in October 2018 indicate that some form of RFS revision is forthcoming,⁸⁰ as the EPA is expected to release a proposed rule concerning RINs in February 2019, with the final rule expected in May 2019.⁸¹ However, despite initial characterizations of these changes as a “broad overhaul,”⁸² there is no suggestion that expected changes will modify the governing compliance system at the heart of the RFS. To the contrary, advance reports suggest that imminent revision may simply reduce the number of waivers available to refineries unable to meet their compliance obligations.⁸³ Indeed, following a May 2018 meeting with White House officials, an oil industry representative criticized the impending policy changes as inadequate.⁸⁴ Accordingly, barring any unexpected shift in directive, it appears the current administration intends to keep the core goals of the RFS intact.⁸⁵

The RFS achieves these policy goals through a uniquely structured compliance system that requires producers to fulfill individualized obligations at the close of each fiscal year.⁸⁶ How the RFS determines these obligations requires a brief detour into the finer details of the RFS’s compliance regulations.

2. The RFS compliance framework

The RFS not only specifies the parties that must adhere to its renewable fuels policies; it also dictates how they may demonstrate compliance. To this end, the RFS vests in the EPA the power to determine annual Renewable Volume Obligations (“RVOs”), which each obligated party accrues based on their petroleum production or import activities.⁸⁷ Functionally, the EPA computes these RVOs by drawing a direct relationship between the annual gallons produced or imported by an obligated party and the renewable volume that entity must produce to offset.⁸⁸ To calculate each individual obligation, the RFS sets forth annual national volume mandates for each type of renewable fuel.⁸⁹ The EPA then converts this nationwide volume to a percentage basis for each biofuel using gasoline and diesel fuel consumption projections for the forthcoming year derived from U.S. Energy Information Administration statistics.⁹⁰ Each refiner “multiplies the percentage RFS for each biofuel times its combined petroleum gasoline and diesel fuel production and arrives at the RVO for each biofuel.”⁹¹

Once established, an obligated party has two options: (1) blend renewable fuels into transportation or heating fuels to offset its RVO, or (2) secure compliance credits as a substitute for actual blending efforts.⁹² Under either option, the means to demonstrate compliance take the form of statutorily created credits called Renewable Identification Numbers (RINs).⁹³

a. RINs

Ultimately, RINs are just thirty-eight-character numeric codes identifying various characteristics related to the RINs’ creation.⁹⁴ Every time any party produces or imports into the United States a qualifying renewable fuel under the RFS, that party generates a RIN.⁹⁵ The RIN generation process occurs simultaneously with the production or importation of the associated “batch”⁹⁶ of biofuel at no additional cost to the producer;⁹⁷ only producers and importers that create or import less than 10,000 gallons of renewable fuel each year are exempt from this RINs generation process.⁹⁸ These RINs, which travel with the physical biofuel at the point of sale,⁹⁹ are ultimately the offset credits used for compliance under the RFS.¹⁰⁰

Each RIN is valid only in the year it was produced or in the year immediately following, and all RINs expire immediately after an obligated party uses them for compliance.¹⁰¹ Of the four types of RINs,¹⁰² those generated by the blending of ethanol into gasoline blendstock are by far the most ubiquitous and, as a result, most commonly traded.¹⁰³ Known colloquially by their regulatory designation as D6 RINs, ethanol compliance credits make up the largest portion, in sheer volume, of the renewable fuels mandate.¹⁰⁴

Perhaps mindful that not all obligated parties would choose to blend renewable fuels as a means to demonstrate compliance, Congress fostered a secondary RIN market by allowing any RIN-generating party to transfer the credits to another.¹⁰⁵ Congress also authorized the EPA to issue regulations permitting “the generation of . . . credits by any person that refines, blends, or imports gasoline that contains a quantity of renewable fuel that is greater than the quantity required” to satisfy that party’s RVO.¹⁰⁶ In so doing, Congress both anticipated and provided for the existence of a separate financial market involving compliance credits.¹⁰⁷

Under the RFS program the trading provisions comprise an integral element of compliance. Many obligated parties do not have access to renewable fuels or the ability to blend them, and so must use credits to comply. The RFS trading program is also unique in that the parties liable for meeting the standard (refiners, importers, and blenders of gasoline) are not generally the parties who make the renewable fuels or blend them into gasoline. This creates the need for trading mechanisms that ensure that the means to demonstrate compliance will be readily available for use by obligated parties.

Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program, 72 Fed. Reg. 23,900, 23,904 (May 1, 2007) (codified at 40 C.F.R. pt. 80).

b. The secondary compliance market

Any party that registers with the EPA may trade RINs,¹⁰⁸ which seems worthless because of their intangibility but nonetheless have intrinsic value because any obligated party may use the credits to satisfy its annual RVO.¹⁰⁹ Accordingly, RINs change hands frequently in a secondary market,¹¹⁰ exposing RIN prices to volatility based on fundamental influences like supply and demand as well as more esoteric drivers such as trading sentiment and market speculation.¹¹¹ This exposure to third-party speculation appears the likeliest candidate for regulatory attention, as the Trump Administration in October 2018 announced that it had directed the EPA to consider reforms aimed at “increas[ing] transparency and prevent[ing] price manipulation in the RIN market.”¹¹² Among the proposed reforms, the Trump Administration announced that it encouraged the EPA to consider prohibiting any entity other than obligated parties from purchasing RINs, requiring public disclosure of RIN holdings at a certain volume threshold, placing a time limit on third-party possession of RINs, and mandating the real-time retirement of RINs for compliance purposes.¹¹³

Current regulatory proposals notwithstanding, the RIN market’s current exposure to speculative influence has a tendency to exacerbate the price effects of shifts in supply and demand, often resulting in sharp moves in RIN prices and, by extension, the compliance costs for obligated parties seeking to satisfy their RVOs with purchased credits.¹¹⁴ Additionally, even if one or more of the Trump Administration’s regulatory proposals were to survive the notice and comment process intact,¹¹⁵ a diverse range of obligated parties would still populate the RIN market, making the elimination of all speculative influence impossible. Regardless of market composition, because some obligated parties produce RINs as a natural consequence of their business model,¹¹⁶ those parties who do not are faced with a difficult reality.

c. Compliance burdens among oil refiners

Although the RFS places an obligation on both parties, it is ultimately refiners, not importers, that shoulder the bulk of the compliance burden under the RFS.¹¹⁷ Furthermore, under the RFS, not all oil refiners are created equal. Refiners vary in business model due to organizational differences and geographic realities. Parties most affected by the RINs scheme are thus separated into two distinct camps: vertically integrated refiners and independent refiners.

i. Vertically integrated refiners

Vertically integrated refiners are companies that engage in fuel blending in addition to their oil refining operations.¹¹⁸ For these companies, the RVOs incurred in the production of oil products are naturally offset by the refiner’s blending of those products into finished fuels for sale through retail distribution assets like branded retail fuel stations.¹¹⁹ By regulatory design, this offset process is, in many respects, unavoidable because almost all of the gasoline sold in the United States today contains ethanol.¹²⁰

It is even possible for the retail obligations of vertically integrated refiners to exceed their refining capacity.¹²¹ In such situations, vertically integrated refiners must purchase gasoline blendstocks from refiners with limited or no downstream assets on an as-needed basis to cover their retail exposure.¹²² In this arrangement, vertically integrated refiners blend petroleum products that they did not create, permitting the generation of RINs with no underlying renewable volume obligation.¹²³ This allows the vertically integrated refiner to sell RINs independent of the blended fuel, oftentimes back to the same refiners who sold them the enabling blendstock.¹²⁴ Additionally, this advantage offers the vertically integrated refiner another potential revenue stream, creating a market distortion that prior academic scholarship has termed a “wealth transfer.”¹²⁵

ii. Independent refiners

Independent refiners are companies that maintain oil refining operations but do not extend their business to blending and downstream distribution of finished fuels products.¹²⁶ Rather, independent refiners sell the fruits of their refining efforts to third-party blenders and distributors.¹²⁷ Unlike their vertically integrated counterparts, independent refiners do not blend the fuels they refine, forcing them to purchase RINs to satisfy their RVOs.¹²⁸ Independent refiners have absolutely no alternative to purchasing RINs for compliance, short of changing their business model entirely.¹²⁹ Moreover, the penalty for noncompliance is steep, with EPA regulations charging obligated parties $32,500 for every day the party remains in violation of its annual RVO.¹³⁰ Thus, independent refiners, because of their business model alone, face greater financial exposure under the RFS framework.¹³¹

Most importantly, independent refiners’ inability to generate RINs compels their participation in the statutorily created secondary market for the compliance credits—a reality that has serious ramifications because of the limitations of Congress’s Commerce Clause authority.

C. The Commerce Clause

The Constitution empowers Congress “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”¹³² In practice, Congress interprets this grant of authority broadly, including within its scope the power to regulate matters both superficially commercial, like the growing of wheat,¹³³ as well as activities less intuitively connected to trade, such as the interstate transportation of kidnapping victims.¹³⁴

While the Supreme Court has approved this liberal construction of the Commerce Clause, the Court nevertheless requires that any activity regulated have a “substantial economic effect on interstate commerce.”¹³⁵ However, even if an activity does not have a direct economic impact on interstate commerce, Congress may nevertheless regulate it if there is a rational basis that the “total incidence” of the activity in the aggregate substantially affects commerce.¹³⁶ Thus, while Congress may exert legislative control over the intrastate growing of crops for private use on the justification that the activity ultimately affects interstate trade,¹³⁷ the Court has held that activities that bear only a tenuous connection to commerce, like the possession of a firearm in a school zone, cannot be upheld under the Commerce Clause.¹³⁸ In distinguishing the two scenarios, the Supreme Court separates inherently economic activity from non-economic activity, with the former justifying Commerce Clause regulation based on its aggregate impact¹³⁹ and the latter subject to limitation by the principles of federalism, particularly when the regulation involves an area traditionally left to the states.¹⁴⁰ This distinction between the regulation of economic and non-economic activity is blurrier than ever following the Supreme Court’s decision in Sebelius.

1. Chief Justice Roberts’s Sebelius opinion

In Sebelius, the Supreme Court addressed a constitutional challenge to the ACA.¹⁴¹ Enacted by Congress in 2010,¹⁴² the ACA was challenged immediately after President Obama signed the bill into law, with an original plaintiff group of thirteen states quickly joined by the National Federation of Independent Business and several individuals.¹⁴³ The plaintiff group challenged two key provisions of the ACA, one of which was the individual mandate requiring uninsured individuals to purchase health insurance.¹⁴⁴

Through the individual mandate of the ACA, Congress attempted to incentivize the purchase of minimum healthcare coverage by essentially forcing every citizen of the United States to make a choice: purchase minimum insurance coverage or pay a penalty.¹⁴⁵ In challenging this requirement, the plaintiffs in Sebelius alleged that Congress lacked constitutional power to enact such a mandate.¹⁴⁶

Chief Justice Roberts, writing alone, opined that the individual mandate could not be justified by Congress’s powers under the Commerce Clause because it “[did] not regulate existing commercial activity.”¹⁴⁷ Instead, the individual mandate “compel[led] individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce.”¹⁴⁸ Distinguishing the individual mandate from other legislative actions justified by the Commerce Clause, Chief Justice Roberts made clear that “[t]he Framers gave Congress the power to regulate commerce, not to compel it.”¹⁴⁹

The Court ultimately upheld the individual mandate as within Congress’s power to tax and spend,¹⁵⁰ but while that segment of Chief Justice Roberts’s opinion commanded a majority of Justices, his Commerce Clause-based invalidation did not.¹⁵¹ Thus, some controversy exists as to whether Roberts’s declaration that Congress may not compel market participation as an extension of its Commerce Clause power is binding precedent or dicta.¹⁵²

2. Notable post-Sebelius Commerce Clause challenges

In the aftermath of the Sebelius decision, several plaintiffs have attempted to extend the logic of Chief Justice Roberts’s opinion to challenge various other acts of Congress that allegedly compel market participation. Of these challenges, three sets of cases bear mention.

a. The Sex Offender Registration and Notification Act

Many defendants accused of sex crimes have challenged the constitutionality of the Sex Offender Registration and Notification Act (SORNA),¹⁵³ creating a category of cases with the same narrow holding concerning post-Sebelius Commerce Clause jurisprudence.¹⁵⁴ The unifying argument in these matters is perhaps best illustrated by United States v. Lott,¹⁵⁵ in which the defendant, a sex offender, argued that Chief Justice Roberts’s Commerce Clause holding in Sebelius prevented Congress from compelling sex offenders to proactively register in a nationwide database.¹⁵⁶ The United States District Court for the District of Vermont acknowledged that Chief Justice Roberts’s opinion provided no real guidance for how a lower court might distinguish activity and inactivity or between market regulation and compulsion.¹⁵⁷ Nevertheless, the district court ultimately upheld SORNA by recognizing that Sebelius did not affect Congress’s “power to regulate intrastate activity when so doing is incidental” to legislation regulating criminal matters incapable of isolation to a single state.¹⁵⁸

b. Other criminal prohibitions

Like SORNA, other criminal statutes penalize actions on the theory that a lack of sanction will deleteriously affect interstate commerce. One such statute, the Hobbs Act,¹⁵⁹ uses the Commerce Clause as justification for prohibiting robbery, extortion, or attempts to commit either.

Marshalling the logic of Sebelius, a defendant convicted for conspiracy under the Hobbs Act challenged the statute’s constitutionality in United States v. McLean.¹⁶⁰ Reasoning that the government “fabricate[d] a crime in a reverse sting operation,”¹⁶¹ the defendant argued that Sebelius precluded federal authorities from constructing conspiracies “that would have never occurred in the absence of federal intervention.”¹⁶² The Third Circuit Court of Appeals disagreed and upheld the conviction, reasoning that the defendant took “affirmative acts toward conduct which, if carried out as envisioned, would affect or potentially affect interstate commerce.”¹⁶³ Thus, the Third Circuit distinguished the Hobbs Act from the ACA provision at issue in Sebelius, which proscribed the compulsion of commercial activity, not Congress’s authority to criminalize actions either planned or already undertaken.¹⁶⁴

The United States District Court for the Northern District of Texas addressed a factually similar case involving a constitutional challenge to a federal firearm prohibition statute in United States v. Spann.¹⁶⁵ Ruling that Chief Justice Roberts’s Commerce Clause holding was unavailable to a convicted felon seeking to purchase a firearm, the district court held that Sebelius was inapposite because the statute did “not compel individuals to act—let alone purchase a product—but rather prohibit[ed] individuals from acting.”¹⁶⁶

c. The Magnuson-Stevens Fishery Conservation and Management Act

In Goethel v. Pritzker,¹⁶⁷ commercial fishermen challenged the constitutionality of the actions of a regional extension of the National Marine Fisheries Service.¹⁶⁸ The regional agency, authorized by the Magnuson-Stevens Fishery Conservation and Management Act of 1976 (MSA),¹⁶⁹ required that third-party monitors accompany all commercial fishermen in the Northeast United States.¹⁷⁰ The provision required the fishermen to pay for the costs of these monitors, whose job it was to “collect certain data related to the particular fishing trip and the fishing vessels’ catch.”¹⁷¹ The plaintiffs argued that this “industry-funding requirement” violated the Commerce Clause because “it compel[led] sectors to enter contracts with private companies,” in contravention of the Supreme Court’s holding in Sebelius.”¹⁷²

The United States District Court for the District of New Hampshire held that the Sebelius ban did not apply because the MSA required compulsory at-sea monitoring only for those vessels which engaged in fishing activities in select sectors.¹⁷³ Thus, because commercial fishermen had the choice not to participate in the sector system and instead “fish in the ‘common pool,’”¹⁷⁴ the court held that “the costs of monitors [were] part of the permissible regulation of plaintiffs’ commercial fishing activities.”¹⁷⁵

Of course, most applications of Chief Justice Roberts’s Sebelius holding have focused solely on federal statutes. The RFS, by comparison, delegates to a federal agency the enforcement of its provisions,¹⁷⁶ bringing into play the trappings of administrative law.

D. The Chevron Roadblock

While the RFS is a work of Congress, most of the authority guiding the regulatory scheme of RINs derives not from the statute, but from regulations promulgated by the EPA.¹⁷⁷ Thus, whereas a litigant may challenge the constitutionality of the RFS, the EPA’s interpretation of the RFS mandate may warrant judicial deference per Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.¹⁷⁸

At its core, Chevron deference stands for the proposition that courts will defer to agency interpretations of statutory ambiguity when those interpretations are reasonable.¹⁷⁹ In matters of agency interpretation of a statute, courts follow the two-step test set forth in Chevron. First, courts must determine whether the statute at issue is indeed ambiguous; if it is not, the analysis ends.¹⁸⁰ However, if the statute is ambiguous, courts move to the second step and consider whether the agency interpretation is reasonable.¹⁸¹

This standard is permissive rather than restrictive; matters of Chevron deference typically turn on a question of whether an agency has strayed beyond the confines of its statutory authority.¹⁸² Accordingly, a challenge to any part of the RINs scheme rooted in EPA rulemaking, and not the RFS itself, faces the tall order of overcoming Chevron; a regime that accords deference to agency interpretation unless it is “arbitrary, capricious, or manifestly contrary” to the governing statute.¹⁸³

Analysis

This Comment brings together two disparate products of legislation and judicial interpretation: the dysfunctional RFS and modern Commerce Clause jurisprudence. In merging these topics, this Comment first summarizes how, despite numerous attempts at revision, the issues plaguing the RFS remain unresolved. Next, this Comment discusses previously suggested means of challenging or avoiding the RFS to solidify that a constitutional challenge to the governing statute is the best-possible solution. Finally, this Comment concludes by arguing that, as a work of Congress, the RFS faces invalidation on constitutional grounds because it violates Chief Justice Roberts’s Commerce Clause holding in Sebelius, which, as binding precedent, expressly prohibits the legislature from using the Commerce Clause as justification for the compulsion of market activity. Thus, because the RFS forces oil refiners with no fuel blending exposure to enter a market for compliance credits, the regulatory scheme is uniquely exposed to constitutional challenge on Sebelius grounds.

A. An Unresolved Problem

This Comment is hardly the first to recognize the shortcomings of the RINs scheme and the RFS overall.¹⁸⁴ However, while the program has consistently attracted the ire of oil refiners,¹⁸⁵ until 2018 no major industry player had been able to cite RINs as anything more than an added financial annoyance.¹⁸⁶ However, with the financial collapse of Philadelphia Energy Solutions, the RFS has entered a new era in which its future no longer seems certain. Now that one of the largest oil refiners in the United States has succumbed to financial burdens imposed by the RFS, it seems increasingly unlikely that the RINs compliance scheme will remain the status quo. Indeed, in the aftermath of Philadelphia Energy Solutions’s demise, there has been a new wave of calls for revision of the RFS.¹⁸⁷

However, just how revision might take place is another question entirely. Various methods of reworking, or dismantling, the RFS are available, but the path of least resistance is a constitutional challenge based on Chief Justice Roberts’s Commerce Clause holding in Sebelius.

B. Distinguishing Alternative Solutions

Certainly, a constitutional challenge is not the only avenue to revising the RFS. To the contrary, arguing against a statute’s constitutionality would seem a rather extreme response. However, while other, more traditional remedial approaches are available, the unique circumstances of the RFS—and the rare opportunity to utilize a piece of Supreme Court jurisprudence that remains unsettled—make a constitutional challenge the best option.

1. Full legislative repeal of the RFS

Like any act of Congress, the RFS and its regulatory progeny are subject to repeal at the whim of the legislature.¹⁸⁸ This solution would certainly cure the inefficiencies and flaws of the RINs scheme, but a wholesale repeal is both highly unlikely and extreme.

To start, while the RFS has become a politically divisive program, its authorizing statute resulted from bipartisan support in both houses of the legislature.¹⁸⁹ Admittedly, political headwinds have shifted considerably since 2007,¹⁹⁰ but opposition to the RFS is not consistent across party lines,¹⁹¹ making it very difficult to expect any coalition vote for repeal. Furthermore, while pressure from anti-RFS oil interests is real,¹⁹² the RFS has been a boon for the corn industry,¹⁹³ complicating a political calculus that, for some representatives, may have been simpler prior to the adoption of the scheme. Admittedly, recent developments suggest that Congress may be preparing to reopen the RFS debate,¹⁹⁴ but even if the legislature embraces revision, political auguring suggests a complete reworking of the RINs compliance system is unlikely.

Thus, legislative repeal, though clearly a potential remedy for impacted parties under the RFS, is both highly improbable and extremely susceptible to shifts in the political climate. Considering the likelihood of political tumult in the next few years—not to mention the need for sustained legislative effort to affect such a large redirect in energy policy—congressional revision of the RFS is simply unworkable. Furthermore, the Trump Administration’s recent EPA directives concerning RIN market transparency¹⁹⁵ suggest that, despite considerable pressure from the oil industry,¹⁹⁶ any change will come not from Congress but from the Executive Branch.

2. The death of independent refining as a legitimate business model

On the other extreme lies a simple solution for independent refiners struggling under the financial weight of the RFS compliance regime: abandon the business altogether. Theoretically speaking, it may be that the regulatory hurdles embodied in the RFS reflect legislative intent to dissuade oil producers from maintaining outdated business models. Indeed, among the supporters of the RFS, this argument remains popular.¹⁹⁷ Such an argument, which in many ways contemplates a “natural death” for the independent refining industry, would also seem justified by data showing slumping gasoline consumption in the United States.¹⁹⁸ Projections for a continued decline in gasoline demand,¹⁹⁹ coupled with a growing shift in the makeup of the transportation sector²⁰⁰ and expectations for a steady increase in energy efficient vehicles,²⁰¹ could suggest that the demise of independent refining is inevitable.

It is not unprecedented for Congress to enact regulations that catalyze the demise of an industry or subindustry, either directly or indirectly.²⁰² However, whether the independent refining business model faces extinction is irrelevant considering how long it would take for the oil industry to embrace and carry out such a shift in the organizational paradigm. Moreover, simply concluding that independent refiners—and perhaps the petroleum fuel industry altogether—will inevitably become obsolete would be to ignore the very real socioeconomic impacts of such an extinction. For example, when Philadelphia Energy Solutions filed for bankruptcy in January 2018, debt-restructuring signaled that the approximately one-thousand jobs created by the refiner were in jeopardy.²⁰³ As political response to the decline of the coal industry attests²⁰⁴ that while creating winners and losers in the name of progress may be palatable, simply abandoning an industry entirely is an altogether different proposition.

Overall, while allowing the RFS to accelerate what may be the inevitable demise of independent oil refining would erase the need for regulatory reform, it is, quite literally, no solution at all.

3. Challenging EPA rulemaking

Because the Clean Air Act and the EISA deputize the EPA for the enforcement of the RFS, the option exists to challenge EPA rulemaking as arbitrary and capricious.²⁰⁵ After all, the regulations providing compliance protocols for obligated parties derive mostly from EPA rulemaking.

This solution is best illustrated in the model proposed by commentators Bob Neufeld and Rebecca Lynne Fey,²⁰⁶ in which independent refiners challenge the EPA’s definition of “obligated parties” as an unreasonable interpretation of the authority conferred by the EISA.²⁰⁷ Neufeld and Fey reason that because the EISA explicitly directs the EPA to enact a program that “ensure[s] that transportation fuel . . . contains at least the applicable volume of renewable fuel,”²⁰⁸ the EPA’s creation of a regulatory program that rewards voluntary blenders that blend below targets²⁰⁹ is inherently unreasonable.

While inarguably sound, challenging the RINs scheme by attacking the EPA’s final rules exposes the argument to the legal quagmires of the Administrative Procedure Act²¹⁰ and Chevron deference.²¹¹ However persuasive, any rule-based challenge to the RINs program is comparatively ineffective, as it is well-settled that agency rules are insulated by an “exceedingly deferential”²¹² standard of review. Furthermore, while challenges to tangentially similar EPA interpretations of the EISA in American Petroleum Institute v. EPA²¹³ and Utility Air Regulatory Group v. EPA²¹⁴ may have succeeded,²¹⁵ they are easily distinguishable.

First, American Petroleum concerned the EPA’s methodology for calculating volume targets for cellulosic biofuel,²¹⁶ an extremely small piece of the regulatory scheme. Whereas cellulosic biofuel volumes made up just 1.2 percent of the total renewable fuel target in 2017,²¹⁷ challenging the reasonableness of the EPA’s definition of “obligated party” involves the entire regulatory framework.²¹⁸ Second, Utility Air involved an EPA decision that had nationwide ramifications; the agency’s interpretation effectively rendered every source of particle emissions, mobile or stationary, subject to EPA permitting requirements.²¹⁹ The EPA’s imposition of its RINs scheme, by comparison, is industry-specific and not controlling over the nationwide economy;²²⁰ a factor the Supreme Court found highly persuasive in Utility Air.²²¹ Thus, while the RINs scheme may indeed involve an agency rule involving “vast ‘economic and political significance,’”²²² the scope of the regime falls short of the “extravagant statutory power”²²³ at issue in Utility Air.

Straying into the jurisprudential thicket inherent in an arbitrary-and-capricious-based agency decision challenge represents a less-effective means of contesting the legality of the EPA’s RINs program.

C. A Novel Approach: Applying Chief Justice Roberts’s
Commerce Clause Holding from Sebelius

While previous solutions have proposed various administrative challenges to the RFS and its RINs scheme, no theory has called into question the constitutionality of the scheme. To do so, a challenger must first tie the RINs scheme to the enabling statutes of the RFS to avoid a likely unwinnable skirmish with Chevron.²²⁴ This requires demonstrating that Congress, not the EPA, forces independent refiners to participate in a secondary compliance market.

1. A threshold matter: the RINs scheme is a work of Congress, not the EPA

First, Congress expressly contemplated a credit-based compliance system in the Clean Air Act, making RINs a statutory creation, not the product of agency rulemaking. Consider that the original RFS established by the Clean Air Act references a “credit program”²²⁵ as the mechanism for demonstrating compliance with the renewable fuel volume requirements.²²⁶ Illustrative here is Congress’s use of the word “shall”²²⁷ in the language of the statute, demonstrating that RINs have their origins not in agency rulemaking, but in legislative action.

Similarly, the Clean Air Act also explicitly authorizes the transfer of compliance credits, making clear that Congress, not the EPA, created the secondary market for RINs. Here, the statutory language is unambiguous—the generation and transfer of RINs exists “for the purpose of complying with [renewable fuel obligations].”²²⁸ Thus, although EPA regulations provide added specificity as to the characteristics and fungibility of RINs,²²⁹ they owe their existence not to the EPA, but to a federal statute.

Additionally, this understanding of the legal authority for RINs is consistent with the EPA’s own understanding of the RFS mandate. In 2015, Janet McCabe, the Acting Assistant Administrator of the Office of Air and Radiation of the EPA, acknowledged that RINs owe their existence not to agency rulemaking, but to the will of Congress.²³⁰ In a hearing before the Senate Subcommittee on Regulatory Affairs and Federal Management, McCabe explicitly referenced RINs as a congressional invention,²³¹ referring to the compliance credit regime as a system that “Congress set up.”²³²

Accepting that RINs originate in federal law, the authority on which Congress based the RFS is of vital importance. Obviously, if Congress did not invoke its Commerce Clause power in enacting the RFS, the regime itself is not exposed to a challenge on those grounds. Helpfully, Congress included in its empowerment of the EPA an explicit reference to enabling authority, notably introducing the RFS with the following:

The Administrator may by regulation designate any fuel or fuel additive . . . and, after such date or dates as may be prescribed by him, no manufacturer or processor of any such fuel or additive may sell, offer for sale, or introduce into commerce such fuel or additive unless the Administrator has registered such fuel or additive . . . .²³³

Thus, while one Congress’s other enumerated powers might insulate the statute from constitutional challenge, its express invocation of the Commerce Clause places the RFS within the bounds of Commerce Clause authority. Accordingly, if Chief Justice Roberts’s holding in Sebelius indeed reflects binding precedent, Congress’s compulsion that oil refiners participate in a secondary market for RINs places the RFS within the scope of what Sebelius suggests is an impermissible use of the Commerce Clause power.

2. Chief Justice Roberts’s Commerce Clause holding in Sebelius is binding precedent

While some legal scholars, and even some district and circuit courts, argue otherwise, the most logical and jurisprudentially meaningful interpretation of the Sebelius decision is that Chief Justice Roberts’s Commerce Clause holding reflects binding precedent. Arguments to the contrary generally note that none of the dissenters in Sebelius joined any portion of the Chief Justice’s opinion, nor did they agree to the judgment of the Court overall.²³⁴ The opposing view thus concludes that the Chief Justice’s opinion was merely a concurrence, robbing the portion of the opinion concerning the ban on compelled market participation of any precedential value.²³⁵

Opposing arguments ignore that the Sebelius dissenters agreed that the individual mandate could be upheld under Congress’s power to tax and spend, which is vital to interpreting which pieces of the Chief Justice’s opinion command the support of the majority of the Court. Importantly, Chief Justice Roberts’s opinion expressly rejected any contention that the Court could reach the question of whether the mandate could be upheld under the taxing and spending power without first “deciding the Commerce Clause” question.²³⁶ Here, the structure of Chief Justice Roberts’s opinion, and the dissent’s acknowledgement of its logical progression, makes clear that a majority of the Court affirmed the Chief Justice’s Commerce Clause holding.

In terms of structure, Chief Justice Roberts’s Sebelius opinion addresses each potential justification for the ACA in turn, exhausting each proposed extension of congressional power before proceeding to the next. To this end, the Chief Justice does not address whether the individual mandate of the ACA may be upheld as an extension of Congress’s taxing and spending power without first concluding, without equivocation, that “the Commerce Clause does not support the individual mandate.”²³⁷ This is key for the dissenters—comprised of Justices Scalia, Kennedy, Thomas, and Alito—who structured their reasoning in the same fashion, proceeding to alternative justifications for the individual mandate only after grappling with the Commerce Clause issue.²³⁸ Logically, this parallelism invites the interpretation that the dissenters, like the Chief Justice, only reach the issue of whether the individual mandate is a valid extension of Congress’s taxing and spending power by first recognizing that the Commerce Clause does not apply.

Of course, it is not by argument structure alone that suggests the dissenters joined Chief Justice Roberts’s Commerce Clause conclusions. To the contrary, the dissenters state that Congress’s attempt to regulate inactivity is precisely why the individual mandate extends beyond the scope of Commerce Clause authority. Consider first that in addressing Justice Ginsburg’s opinion, which accepted the individual mandate as within Congress’s Commerce Clause authority, the dissenters explicitly state that a failure to purchase health insurance is not an activity that Congress may regulate because it, by nature, does not represent activity at all.²³⁹ In so reacting to Justice Ginsburg’s challenges, the dissenters thus lend precedential weight to Chief Justice Roberts’s Commerce Clause holding, as the opinions marshal the same logic in reaching their legal conclusions.

Furthermore, in grappling with the limits of the Commerce Clause power, the dissenters take steps to distinguish both Wickard v. Filburn²⁴⁰ and Perez v. United States²⁴¹ by drawing limits to the Commerce Clause power that mirrors the reasoning of Chief Justice Roberts.²⁴² Acknowledging that Wickard and Perez represent “the most expansive assertion of the commerce power in our history,”²⁴³ the dissenters nevertheless clarify that both cases involved some affirmative activity, not inactivity. To the dissenters’ argument, whereas Wickard involved the decision to grow wheat for personal use²⁴⁴ and Perez concerned local practices of dishonest money lending,²⁴⁵ each circumstance involved commercial action. By contrast, had Congress attempted to regulate by compelling the defendants in Wickard and Perez to grow wheat and make loans, respectively, such an action would mark an impermissible extension of federal power.²⁴⁶ Thus, the dissenters concluded, compelling individuals to engage in a commercial action—purchasing healthcare—was beyond the scope of Congress’s Commerce Clause power.²⁴⁷

Accordingly, in explicitly mirroring the Chief Justice’s Commerce Clause reasoning²⁴⁸ and then proceeding to analyze whether the individual mandate might be justified as a tax,²⁴⁹ the four dissenters rendered the Chief Justice’s Commerce Clause discussion binding precedent by a five-to-four majority.²⁵⁰ Furthermore, the dissenters own words make clear their views on whether the Commerce Clause may be so construed when they stated that Congress may not justify the regulation of commercial action under the mere guise of “compelling its existence.”²⁵¹

Moreover, while controversy persists and the Supreme Court has yet to clarify what portions of its Sebelius decision hold precedential weight, the dominant interpretation in lower federal courts and among legal scholars is clearly that the Chief Justice’s opinion is part of the Court’s holding.²⁵² Thus, even in the absence of jurisprudential clarity, or even consistent treatment amongst circuits, the application of the Chief Justice’s opinion in cases throughout the lower federal courts strongly suggests that the Commerce Clause reasoning is already accepted. Many legal commentators draw similar conclusions, finding that the Roberts’s holding likely functions as a “holding in practice,”²⁵³ if not one explicitly recognized.²⁵⁴

3. The RFS is uniquely exposed to a post-Sebelius Commerce Clause challenge

As discussed above,²⁵⁵ many litigants have attempted to use Sebelius to challenge other forms of legislation as an impermissible extension of Congress’s Commerce Clause power. Although each has failed, they do not stand for the proposition that Chief Justice Roberts’s Commerce Clause holding has been isolated to the facts of Sebelius alone. To the contrary, while previous cases invoking Sebelius involve challenges based on similar logic, they do not represent the unique circumstances at hand with the RFS and RINs.

First, although Lott and its sibling cases seem to justify compelled market participation by claiming that Sebelius can be read harmoniously with Congress’s need to regulate interstate activity, the activity at issue in Lott was notably noneconomic.²⁵⁶ Furthermore, the court in Lott was concerned primarily with a challenge to uniquely intrastate activity and thus availed itself of precedent from Gonzales v. Raich,²⁵⁷ which Chief Justice Roberts’s holding in Sebelius notably left intact.²⁵⁸ Conversely, the activity at hand in the RFS challenge—the purchase of RINs—is both inherently economic and interstate in nature, clearly distinguishing the challenge from that in Lott and its brethren.

Similarly, unlike the challenges at issue in McLean and Spann,²⁵⁹ the RFS does not seek to enforce criminal sanctions; a matter that was dispositive on the Commerce Clause challenge in both cases.²⁶⁰ Instead, Congress in the RFS legislated that compliance violations carry civil penalties.²⁶¹ Cases like McLean and Spann are thus distinguishable because, unlike the RFS, they seek to prohibit criminal action. By comparison, what the RFS seeks to do is achieve policy goals by compelling participation in statutorily created secondary market.²⁶²

Finally, although Goethel is perhaps the clearest factual parallel to a challenge to the RINs scheme,²⁶³ it too is distinguishable. Unlike the commercial fishermen in Goethel, independent refiners are not faced with avoidable regulation. Whereas the commercial fishermen had the option of simply changing the areas in which they fished,²⁶⁴ independent refiners have no such option. Their choice, if one exists at all, is illusory: they either comply by entering a market they otherwise would not, or they face penalties from the EPA. Key to the District of New Hampshire’s justification in Goethel was that nothing Congress required “taxe[d], assesse[d] fees, or otherwise penalize[d] [fishermen] for choosing a course of action . . . that did not require at-sea monitoring.”²⁶⁵ Independent refiners, by comparison, are subject to penalty unless they participate in the market for RINs.²⁶⁶ Instead, they are plainly “compelled” within the definition contemplated by Chief Justice Roberts in Sebelius.

4. The RFS forces independent refiners to participate in specified commercial action, exposing it to a Sebelius challenge

Independent refiners are in a unique position to challenge the RINs scheme because they do not blend fuel and thus do not actively engage in the RINs market. Here, the circumstances cited by Philadelphia Energy Solutions in its bankruptcy filing are illustrative.²⁶⁷

Because Philadelphia Energy Solutions does not have the infrastructure necessary to blend fuel itself, it cannot generate RINs on its own.²⁶⁸ Instead, the refiner must purchase separated RINs from those parties who blend more than their volume obligation.²⁶⁹ Key here is Chief Justice Roberts’s classification of “active” and “inactive” parties in commerce, which lends itself quite clearly to vertically integrated and independent refiners. Vertically integrated refiners, who blend fuel as a part of their business model, are voluntary participants in fuel blending and thus qualify as “active” parties in commerce. Following Chief Justice Roberts’s Sebelius logic, requiring vertically integrated refiners to participate in a compliance scheme grounded in an extension of their business is clearly within Congress’s Commerce Clause power. Conversely, independent refiners like Philadelphia Energy Solutions would never participate in the market for RINs were it not for Congress’s RFS mandate.

Additionally, recall that, like the penalty facing individuals who did not secure insurance coverage in Sebelius, obligated parties who do not secure sufficient RINs to meet their RVO are subject to civil penalties under the RFS. Refiners like Philadelphia Energy Solutions really have no choice at all; instead, they are compelled “to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce.”²⁷⁰

Admittedly, one distinction between the ACA and the RFS is that the individual mandate found unconstitutional in the former applied to all citizens of the United States, whereas the RINs scheme in the RFS concerns only “obligated parties” as defined by the statute. However, Chief Justice Roberts did not limit his restriction on the Commerce Clause to only those statutes compelling all citizens to engage in commercial activity. Rather, the Chief Justice connected his reasoning to the Supreme Court’s earlier holdings in Raich and Perez by drawing a distinction between permissible congressional regulation of “class[es] of activities”²⁷¹ and of impermissible compulsion of “classes of individuals.”²⁷² The fatal flaw of the individual mandate, according to the Chief Justice, was that Congress attempted to regulate uninsured individuals on the basis that their decision not to engage in the healthcare market constituted a legitimate basis for classification based on activity.²⁷³ Instead, Chief Justice Roberts held impermissible simply classifying a group for regulation solely because its members “elected to refrain from commercial activity.”²⁷⁴

This line of reasoning is relevant for two reasons. First, it suggests that Sebelius is not limited to situations involving attempts to regulate all citizens; it instead establishes that the Commerce Clause does not authorize the regulation of individuals based on identifying characteristics separate from “any activity in which they are engaged.”²⁷⁵ Second, and perhaps most importantly, Chief Justice Roberts’s reasoning makes clear that permissible regulation strays into unjustifiable compulsion when the qualifying criterion for compulsory participation in a federal scheme is commercial inactivity rather than activity.²⁷⁶

The RFS’s treatment of independent refiners runs afoul of these principles. Unlike the classification in Perez, which concerned an affirmative commercial action, the RFS’s compulsory RINs scheme, like the ACA’s individual mandate, compels market participation based solely on a decision not to engage in certain commercial behavior. As Philadelphia Energy Solutions made clear, independent oil refiners make a choice not to participate in fuel blending, reflecting a decision to avoid a specific commercial action. In forcing Philadelphia Energy Solutions and other independent refiners to participate in a secondary market for compliance credits generated only through fuel blending, Congress has effectively “force[d] individuals into commerce precisely because they elected to refrain from commercial activity.”²⁷⁷ Any law so operating, per Sebelius, cannot be justified under the Commerce Clause.²⁷⁸

Conclusion

The effects of the RFS are far-reaching, impacting everything from the cost of public transit to employment statistics to the price of groceries. However, the recent bankruptcy of Philadelphia Energy Solutions signals that, despite the EPA’s best efforts, the shortcomings of the RFS that felled the likes of Jeff Gunselman and OceanConnect six years ago are not curable through patchwork means or stop-gap measures. For at the heart of the program lies a fatal flaw: a credit-based compliance scheme that unfairly burdens some oil producers simply because they do not engage in fuel-blending.

Nevertheless, in this flaw lies a rare opportunity for a prospective challenger like Philadelphia Energy Solutions to circumvent the political and procedurals thickets of legislative revision and administrative law by pursuing RFS revision or repeal through constitutional means. Namely, by utilizing Chief Justice Roberts’s Commerce Clause holding in Sebelius, an RFS challenger may invoke the core constitutional principle embraced in that case by a majority of Supreme Court Justices: Congress may regulate commercial activity but may not compel it.

This principle has already clearly taken root in lower federal courts, even without definitive clarification on the state of Commerce Clause jurisprudence from the Supreme Court itself. In mounting a Sebelius-based challenge to the RFS as an unconstitutional extension of Congress’s Commerce Clause powers, a plaintiff like Philadelphia Energy Solutions not only strikes at the real failing of the program overall, but also provides the Supreme Court with the opportunity to more firmly delineate the bounds of an integral congressional power. Such a challenge presents the rare opportunity for a challenger to expedite a needed shift in truly impactful legislation as well as push the judiciary to harmonize its constitutional jurisprudence.

The RFS is indeed broken, despite its lofty aspirations and undeniably good intentions. Although the system may have indeed proven to be a train wreck, the clearest legal avenue for cleanup could bring clarity to an unsettled question on the constitutional limits of congressional power.

Using the Supreme Court's Enigmatic Commerce Clause Holding in Sebelius to Challenge Congress's Broken Renewable Fuel Standard

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