EPA Renewable Fuel Shift May Increase Cost Of Compliance

Renewable Identification Numbers (RINs) are the "compliance currency" for refiners and importers of gasoline and diesel fuel.1 RIN compliance efforts are costly in themselves,2 but noncompliance is too. A non-compliant company is subject to civil penalties which could feasibly run up to $47,357 a day.3 Non-compliance may also require that company to return any economic benefits that resulted from its non-compliance.4

Given these stakes, those required to retire RINs should understand not only what RINs are but also how they relate to compliance. This understanding can also be useful to others, such as those interested in trading RINs, because the way compliance is determined can affect RIN prices. Accordingly, this article is an introductory discussion on (a) what are RINs, (b) how are they priced, and (c) how EPA's 2020 rules may affect compliance costs.

1. What are RINs?

   Generally, a RIN is a number that attaches to a batch of renewable fuels.5 RINs function as receipts that can either be retired by their generator or traded to a third party.6 This third party can itself either retire the RIN or trade it to another. But not just anyone can generate a RIN, not just anyone can trade a RIN, and not just anyone can be credited with retiring a RIN.

   RINs must be generated before they can be retired or traded.7 RINs can be generated in two ways: (1) a renewable fuel producer produces a batch of qualifying renewable fuel and assigns a RIN to this batch;8 or (2) an importer assigns a RIN to an imported batch.9

   Once generated, the RIN becomes logged in EPA's Moderated Transaction System (EMTS).10 Only RINs logged in this system may be retired or traded.11 RINs may also be separated from their underlying fuel and traded separately.12

   The separation process is regulated. A RIN can be separated by possessing the batch,13 blending it,14 or exporting it.15 Only the following can hold a separated RIN: obligated parties; renewable fuel exporters; renewable fuel producers; and registered RIN market participants.16 So, while not just any person can trade RINs, it is possible to become registered and to start.

   Why RINs are regulated this way can be explained by placing them in a broader context.

   RINs are used by EPA to measure an obligated party's compliance with the Renewable Fuel Standard (RFS) program.17 Launched under the Energy Policy Act of 2005,18 the RFS requires a statutorily specified number of renewable fuels to be introduced into the United States every year.19 This volume is known as the national Renewable Volume Obligation (RVO). To satisfy the national RVO, EPA imposes individual RVOs on obligated parties.20 Individual RVOs are approximately equal to the percentage of gasoline and diesel fuel that the obligated party is expected to introduce into the United States during the coming year, as compared to other obligated parties.21 This concept is explained succulently in Americans for Clean Energy v. EPA:22

   EPA first determines the annual volume requirement…[which] represents the total volume of renewable fuel that must be sold or introduced into the Nation's transportation fuel supply in a given year…After EPA determines the [renewable volume requirement]…it translates the volume requirement into percentage standards. The percentage standards inform each obligated party of how much renewable fuel it must introduce into U.S. commerce based on the volume of fossil-based gasoline or diesel it imports or produces. The percentage standards represent the percentage of transportation fuel introduced into commerce that must consist of renewable fuel…Once EPA issues a rule informing obligated parties (refiners and importers) of their renewable fuel obligations, it is up to the obligated parties to comply with the statute.

   Each RIN counts towards the obligated party's RVO, which in turn is made up of RVOs for each designated fuel.23 Designated fuels are cellulosic biofuel (D3/D7), biomass-based diesel (D4), advanced biofuel (D5), and renewable fuel (D6).24 Each obligated party's RVO is satisfied when the party retires the appropriate number of RINs according to each category.25

   But the categories are nested: D3 and D4 fuels also qualify towards D5 counts, and D5 contributes towards D6 counts. The rule is organized this way because D3 and D4 have lower greenhouse gas lifecycles than corn starch ethanol, which is the primary source of D6 fuels.26 This reveals the RFS policy goal of increasing renewable fuels while decreasing greenhouse gas emissions.27

   Thus, RINs are both the compliance currency for climate control and also a systematic method to create demand for renewable fuels.

2. RIN pricing

   RIN prices are heavily influenced by two factors: the blend wall and policy uncertainty.28

   1. Blend wall

      A blend wall refers to the point at which the marketplace and existing infrastructure cannot practically accommodate more fuel with renewable content.29 In the United States, the blend wall occurs at 10 percent.30

      When the national RVO is set higher than the blend wall, RIN prices become volatile.31 This volatility may be explained by EPA's statement that: "if the RIN market is functioning efficiently the RIN price should be approximately equal to the difference between a renewable fuel's supply price and its demand price."32 When the RVO is set higher than the blend wall, more ethanol is demanded. This increases its price and should also increase RIN prices for ethanol too. But this seems to suggest that RINs are an added cost of the underlying fuel.

      Instead, RINs function more as a transfer payment than an added cost.33 Income from separated and sold RINs...