A federal court delivered a blow to the biofuel industry Friday when it ruled the Environmental Protection Agency (EPA) must lower certain targets in a key biofuel-blending rule.

The U.S. Court of Appeals for the District of Columbia Circuit sided with the American Petroleum Institute (API), saying the EPA cannot set forward-leaning blending projections for cellulosic biofuel when supplies aren't available to meet the requirements. 

“[W]e agree with API that EPA’s 2012 projection of cellulosic biofuel production was in excess of the agency’s statutory authority. We accordingly vacate that aspect of the 2012 RFS (renewable fuel standard) rule and remand for further proceedings consistent with this opinion,” the court said in its decision.

A biofuel trade group official familiar with the case told The Hill that the court decision creates uncertainty for investment in cellulosic biofuels, a type of “advanced” biofuel made from non-edible feedstock.

The cellulosic portion is one component of the renewable fuel standard, the linchpin for the domestic biofuel industry. The petroleum trade group is trying to get Congress to repeal the rule while also fighting it on the legal front. 

The Friday court decision on the cellulosic portion amounts to the oil-and-gas lobby's first major victory in that effort.

The rule requires refiners to blend 36 billion gallons of biofuel into traditional transportation fuel by 2022. Of that total, the EPA had called for refiners to blend 10.45 million ethanol equivalent gallons last year — but producers pumped out just 22,000.

API said refiners were forced to buy credits for phantom gallons of cellulosic biofuel to meet the EPA’s targets. It said the EPA should bring its projections in line with actual production levels.

The court agreed with that opinion on Friday.

"We’re hopeful Congress will take note of this decision and recognizes the way the RFS is constructed encourages this behavior," Bob Greco, API downstream director, told The Hill on Friday.

The aggressive blending projections were meant to drive investment into cellulosic biofuels. The biofuel industry has vigorously defended the blending targets, saying any alterations would spook investment.

The biofuel industry source said it is too early to tell how investors will respond. The source added that API also has challenged the EPA’s cellulosic production targets for 2011, and that the agency’s projections for this year have not yet been released.

The source noted, however, that the court upheld the EPA’s projection of 2 billion gallons of overall advanced biofuels.

"[A]lthough we disagree with the court's decision vacating the 2012 cellulosic volumes, today's decision once again rejects broad-brushed attempts to effectively roll back the federal Renewable Fuel Standard," biofuel trade groups said Friday in a join statement.

API had contested the advanced biofuel mark as well. But the court said the EPA’s practice of allowing imports of Brazilian sugarcane ethanol and other advanced biofuels was acceptable for meeting the 2 billion gallon threshold.