Rewriting the Book on RINs

The renewable identification number system was designed to serve as a framework to help ensure that mandates required by the renewable fuel standard (RFS) program are met. As the U.S. EPA works to implement the second stage of the RFS program (RFS2), the agency has proposed ways to improve and streamline the system in order to address problems that emerged under RFS1 and ensure that the additional complexities of RFS2 can be effectively managed.
By Erin Voegele | August 10, 2009
The U.S. EPA released its proposed rule for the second stage of the renewable fuel standard (RFS2) program in May. The rulemaking is designed to implement changes to the current renewable fuel standard (RFS1) program, as required by the Energy Independence and Security Act of 2007 (EISA). A 60-day public comment period on the proposed rule, originally scheduled to end July 27, was extended to Sept. 25.

EISA requires several changes to be made to the RFS program. Most significantly, the act increased the renewable fuel mandate from 7.5 billion gallons by 2012 to 36 billion gallons by 2022. Other alterations to the program include the establishment of four unique categories of renewable fuel, baseline carbon reduction thresholds for each of those categories, changes in the definition of renewable biomass, new registration requirements, and the inclusion of diesel and non-road fuels in the program.

In addition to these changes, EPA's proposed rule for the RFS2 program makes several changes to the renewable identification number (RIN) system. According to the EPA's preamble to the proposed rule, the current RIN system, established to implement RFS1, was designed to be straightforward and maximize flexibility. The agency says it was ultimately intended to ensure that the required volume of renewable fuel is produced and blended into U.S. transportation fuel, and that the volumes of renewable fuel are verifiable and allow the existing system of fuel distribution and blending to be maintained.

In its proposed rule for the RFS2, the EPA essentially proposes to continue using the existing RIN framework, but with certain modifications that will allow the system to implement the provisions required by EISA and address new complexities in the RFS program.

Complicated Changes
The establishment of four separate categories of renewable fuel is one of the most significant changes, says Clayton McMartin, president of Clean Fuels Clearinghouse, which owns and operates the RINSTAR Renewable Fuels Registry. The new categories are cellulosic biofuel, biomass-based diesel, advanced biofuel and renewable fuel. "The fact that there are four different categories increases the complexity of the program," McMartin says.

"The other really unprecedented change is the fact that the [EPA] Administrator has authority and responsibility to assess market conditions on an annual basis and make adjustments to the mandates or to the standard year over year," McMartin says. "That is huge. Never before has EPA had that level of authority."

Under RFS1, renewable fuel producers generated RINs by virtue of producing renewable fuel. "The way things are done right now [under RFS1], producers produce the ethanol, they assign the RINs, they sell the ethanol and , at that point, their role in the supply chain is effectively complete and they can do their quarterly and annual reporting," says David Bennett, a certified public accountant and owner of Renewable Energy Compliance and Advisory Services. "RFS2, in terms of accountability and responsibility, flips that upside down.
Now there is a lot more responsibility that rests on their shoulders."

New responsibilities include additional registration requirements, the completion of third-party engineering reviews and the ability to track and verify feedstocks used in the fuel production process.

The D Code

RIN: KYYYYCCCCFFFFFBBBBBRRDSSSSSSSSEEEEEEEE

K = Code distinguishing assigned RINs from separated RINs
YYYY = Calendar year of production or import
CCCC = Company ID
FFFFF = Facility ID
BBBBB = Batch number
RR = Code identifying the Equivalence Value
D = Code identifying the renewable fuel category
SSSSSSSS = Start of RIN block
EEEEEEEE = End of RIN block




In the event the RFS2 program is implemented mid-year 2010, some RINs generated during the year would be applicable for the RFS1 standard, while others would be applicable for the RFS2 standard. Because the meaning of the D Code in RFS2 RINs will differ from the meaning of the D Code in RFS1 RINs, one option would be to assign D Codes that don't overlap between the two standards. The U.S. EPA's alternative approach for this situation is presented in the following chart.



In some cases, more than one fuel pathway may apply to a facility within a compliance period. In the event these pathways have been assigned different D codes, it must be determined which D code to use when generating RINs. EPA's proposed approach for accomplishing this can be found in the following chart.



Under the proposed rule for RFS2, to generate a RIN, the renewable fuel producer must be able to verify that the feedstock used to produce the fuel meets the definition of renewable biomass. Alternatively, to produce fuel without generating a RIN, the producer must be able to prove that the feedstock does not meet the definition. According to the EPA's preamble to the proposed rulemaking, this requirement has been included to prevent eligible renewable fuel producers from opting out of the program by simply choosing not to evaluate feedstock and generate RINs. In other words, the EPA is proposing to require a demonstration of the type of land used to produce any feedstock used in the production of renewable fuel. It further proposes requiring RINs to be generated for fuel that is produced from qualifying feedstocks.

Another significant change applies to the RFS1 provision that requires RINs assigned to fuel blended into heating oil or jet fuel to be retired. Under the proposed RFS2 rule, RINs assigned to fuel used for these purposes would be allowed to remain valid for compliance purposes. During 2009, these RINs would continue to be retired. However, those retired RINs would be eligible for reinstatement by the retiring party in 2010 and would be valid for compliance with the 2010 RFS mandates.

In the proposed rule, the two-year valid life of RINs is maintained, which means that excess 2009 RINs will still be eligible to meet the 2010 RFS standard. Although the 60 percent greenhouse gas reduction threshold for cellulosic biofuel will not have been verified for 2009 RINs generated for cellulosic biomass ethanol, the EPA is proposing that those RINs be eligible for compliance purposes to meet the 2010 cellulosic biofuel standard.

Although the EPA proposes to maintain the system by which RINs move throughout the supply chain, it is also taking comment on two options that involve removing the RFS1 restriction that requires RINs to be assigned to and transferred with batches of renewable fuel. The first option would allow renewable fuel producers to sell RINs to any party separately from the volumes of renewable fuel; the second would allow renewable fuel producers to sell unassigned RINs only to obligated parties. McMartin says that restricting the sale of RINs to obligated parties would result in less market efficiency. "A closed system would probably not be in the best interest of the producer — or anybody midstream in the supply chain," he says.

In its proposed rule, the EPA has also created an opportunity to generate RINs for renewable electricity, natural gas and propane that is used as transportation fuel. According to the preamble to the proposed rule, this approach is consistent with EISA's requirement that all transportation fuels be included in the RFS2. However, RINs could only be generated for these fuels under limited conditions. The fuel would need to be produced from feedstock meeting the definition of renewable biomass, and the party generating the RINs would be required to identify the specific quantity of the fuel that was actually used as a transportation fuel.

As established in EISA, the proposed rule for RFS2 also eliminates the RFS1 2.5-to-1 credit for cellulosic biomass ethanol and waste-derived ethanol. Under the RFS2 rulemaking, these fuels would have an equivalence value of 1, which is consistent with all other forms of ethanol.

Although several details of the RFS program in relation to RINs have been altered under EISA and the RFS2 rulemaking, the EPA is also proposing to leave many of the RFS1 regulatory requirements of the RIN system largely - or in some cases - entirely unchanged. Some provisions expected to remain largely intact are the way RINs are distributed, separated and used to demonstrate compliance by obligated parties; the provisions for exporters; the recordkeeping and reporting requirements; the deficit carryover; the two-year valid life for RINs; and the 20 percent rollover cap.

As in RFS1, the EPA is proposing that each RIN continues to represent one gallon of renewable fuel, and that each RIN continues to be represented by a 38-digit number. Most of the codes contained within the RIN will also continue to have the same meaning, with one exception. The D code will now be used to identify each of the four categories of renewable fuel established by EISA, rather than the two categories of renewable fuel that are applicable under RFS1. Producers will be able to identify the proper D code for their fuel using an EPA-provided look-up table that will identify the specific fuel pathway for each combination of renewable fuel type, feedstock used and production process.

In order for the RFS2 program to be implemented, the EPA intends to require that all parties who generate, own, transfer and/or use RINs re-register with the agency. As part of this re-registration, renewable fuel producers would be required to provide information about their feedstocks, facilities and products. This information would be used by the EPA to verify the validity of RINs as well as their proper categorization into one of the four renewable fuel categories.

Moderated Transaction System
In the RFS2 rulemaking, the EPA also proposes to change the 2010 reporting schedule. Under the current schedule, obligated parties, renewable fuel exporters, renewable fuel producers, renewable fuel importers and any party who owns RINs must submit certain information to the EPA on a quarterly and/or annual basis. In 2010, the agency is proposing that these quarterly reports would be required to be submitted on a monthly basis. According to the EPA's preamble to the proposed rule, this new schedule would help minimize problems associated with invalid RINs while the agency develops the EPA-Moderated Transaction System (EMTS). Once the EMTS system is operational in 2011, batch and RIN transaction reporting could be submitted in real time.

Real-time reporting means that reportable events, such as the generation of a RIN or a RIN transaction, would be submitted to the EPA through the EMTS within three business days. The EPA-managed system, which is currently under development, would be a closed system. EMTS would essentially provide a mechanism for EPA to screen RINs as well as an environment for conducting RIN transactions. Using the EMTS system, the screening and assignment of RINs would be executed as the RINs are generated.

The EPA believes the screening system will help ensure market confidence that each RIN is genuine and valid, and will greatly reduce RIN-related errors while efficiently and accurately managing the RINS.

"I think the EPA's Moderated Transaction System will minimize — but won't eliminate completely — the number of invalid RINs in the marketplace," McMartin says. "And, certainly the [RIN] market needs a higher level of confidence."

The EPA acknowledges that, through the implementation of RFS1, it has found that RINs have proven confusing for many and that various errors have occurred though the generation and use of RINs. Once an error is made with a RIN, it often propagates throughout the entire distribution system. Due to the fact that RFS1 reporting for RIN transactions has only been required on a quarterly basis, RIN errors may remain undetected for months. Once they are discovered, correcting an error often requires significant time and resources to complete.

The added complexity of RFS2 creates an environment where these errors could become more common. According to the preamble of the proposed rule, the best way to avoid problems with RIN validity in the future is to screen RINs and conduct RIN-based transactions though the EMTS.

Using the EMTS, a renewable fuel producer would electronically submit a batch report for the volume of renewable fuel that has been produced in addition to a list of RINs that were generated and assigned to that fuel. The EMTS would then automatically screen each batch and either reject the RINs, or allow them to be posted to the generator's account.

In an example of how an EMTS RIN transaction could work, a seller could log into his or her account and post a sale of 100 RINs to a buyer. The seller's applicable RIN account would be reduced by the same number of RINs — in this case 100. The buyer would then log into his or her account and see the pending transaction. In the event the buyer accepts the transaction, his or her applicable RIN account would be increased by 100 RINs. Once the transaction is complete, the EMTS would notify both parties. According to information published by the EPA, it is expected that the EMTS would always require the seller to initiate a transaction. In addition, transactions would be limited to the available RINs in the seller's account.

While the EMTS is not expected to be fully operational until 2011, the EPA is expected to allow interested parties to opt into the system as it is developed. This option would allow obligated parties to become familiar with the system and allow the EPA to effectively test EMTS before it becomes fully operational.

The EPA is also proposing to add two additional requirements to RIN transaction reporting. For reports of RINs assigned to volumes of renewable fuel, the agency seeks to require that volumes of renewable fuel be reported. In addition, the agency also proposes that RIN price information be submitted with transactions involving both separated RINs and assigned RINs. According to the EPA, this data would be helpful in setting future mandates and would provide additional insight into the market when assessing potential waivers to the RFS program. Parties who retire RINs would also be required to explain why those RINs were retired.

The EMTS is expected to be managed through the EPA's Central Data Exchange. In its preamble to the proposed rule, the agency states that parties would be required to establish an EMTS account by Oct. 1, 2010, or 60 days prior to engaging in any transaction involving RINs — whichever is later.

McMartin says it's important to note that the EMTS is not going to offer a total solution to a company's recordkeeping needs. "Many people think the EPA is going to provide a system for companies to keep all their records and handle all of their reporting and so forth," he says. "That's not true. The notion that EPA is going to build a system that could serve as an in-house enterprise system for companies is not going to happen." Rather, these parties are either going to have to maintain internal recordkeeping systems or outsource those services to third-party entities.

Bennett says it's hard to say exactly what kind of impact the EMTS will have. "On the one hand, the benefit is that it requires RINs to be validated to a certain extent up front," he says. However, the system could create its own problems. "[The EMTS] could easily create a timing issue for parties receiving their RINs," Bennett says. In order for the transaction to be complete, the EMTS has to validate the RIN and the buyer has to accept the transaction. "That could result in a delay of the transfer of the actual RIN, which would result in a delay for the purchasing party…being able to trade those RINs," he says. "Since RINs are a commodity subject to daily fluctuations in price, it could potentially cost traders a lot of money and a loss of the element of control over the ability to move this commodity quickly."

Bennett also says the EMTS could be a slippery slope in terms of how the EPA interacts with the system and the parties involved. "There are going to be situations where the EPA is going to have to decide…how to resolve…issues with invalid RINs," he says. "In some of these cases, it may be viewed that the EPA is bordering on being involved in a commercial transaction as opposed to just moderating it."

Foreign Producers
In the proposed rulemaking, the EPA subjects foreign renewable fuel producers importing fuel to the U.S. to the same requirements as domestic producers. This means that foreign renewable fuel producers who export product to the U.S. would face the same feedstock recordkeeping requirements as domestic producers. According to the EPA's preamble to the proposed rule, an importer would be required to obtain documentation from a foreign producer proving whether or not the feedstock used to produce the fuel meets the definition of renewable biomass.

This involvement of foreign producers in the RIN market represents a potential challenge. "Foreign producers under RFS1 don't really participate in the RFS program," McMartin says. "Instead, the importer of record that brings that product into the United States, deals with RINs and is responsible for assigning the RINs for that product." The RFS2 feedstock requirements mean the importer won't be able to serve in this role in the future, he says. Instead, the foreign producer would likely be responsible for assigning RINs to volumes of fuel.

Bennett says he thinks it's difficult to say how foreign producers will ultimately participate in RFS2. "The laws and regulations that those countries have within their own infrastructure may not be conducive to the rules and regulations the U.S. has within our infrastructure," he continues. "This means they may have difficulty meeting [the EPA's proposed] requirements." Bennett says the ability or willingness of foreign producers to be able to meet the stringent regulations proposed by the EPA is questionable at this time.

The Future of the RIN Market
"The RIN market is going to continue to be volatile as long as there is uncertainty," McMartin says. "That's one thing I know for sure. Until things settle down and the RFS2 is finally promulgated and issues like indirect land use are finalized, the market is going to be pretty thin and there is going to be uncertainty."

Bennett says the content of the final rule and the timing for RFS2 implementation will have a significant impact on the market, especially in light of the extension to the public comment period. "We don't know if that will provide enough time for EPA to put RFS2 into effect by Jan.1," he says. One option may be for the EPA to put part of the RFS2 program into effect on that date, and implement the rest of the program at a later date. Another option would be to select a later implementation date. "There has been a lot of talk of putting RFS2 into effect mid-year, which I think would be a major difficulty," Bennett says. "I think it would be a mistake." He says this is because a mid-year implementation date would add even more complexity to an already complex transition period.

Even so, Bennett says he thinks that the future of the RIN market will be lucrative. "I think it will continue to drive the renewable fuel standard and activity," he says. "There are companies that are entering the marketplace that are not involved with physical product and are only focused on trading RINs. This could potentially have a positive impact on the marketplace."

Erin Voegele is an Ethanol Producer Magazine associate editor. Reach her at evoegele@bbiinternational.com or (701) 373-8040.