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Renewable Identification Numbers (RINs) and Government Biofuels Blending Mandates

AgMRC Renewable Energy Newsletter
April 2009

Robert Wisner
Professor of Economics and Energy Economist
Ag Marketing Resources Center
Iowa State University
rwwisner@iastate.edu

The December 2007 Energy Independence and Security Act set mandated levels for 2008 through 2022 for various types of renewable fuels that are to be blended with U.S. gasoline and diesel fuel.  Mandated levels of biofuels blending are scheduled to increase progressively each year until 2022.  By that year, 35 billion gallons of ethanol and a billion gallons of biodiesel fuel are to be blended with U.S. motor fuel.  At the current consumption rate, that would be equivalent to about 25% of U.S. gasoline use in volumetric terms.  It is one thing to mandate how much biofuel should be blended in gasoline and diesel fuel, but quite another challenge to develop a mechanism for insuring that the desired level of blending will be achieved. 

Renewable Identification Numbers (RINs) are the mechanism for insuring that the prescribed levels of blending are reached.  The U.S. Environmental Protection Agency (EPA) is responsible for overseeing and enforcing blending mandates and developing regulations for RINs.  RINs can take on a value of their own at certain times, thus reflecting developments in the economics of blending biofuels with gasoline and diesel fuel.

How the RINs Program Works

RINs are a complex mechanism for implementing the mandates.  It is the method used to insure that the mandated amount of biofuels is actually blended into motor fuel.  They are issued at the point of biofuels production or import.  For example, an ethanol company may issue RINs for a month’s production of ethanol.  EPA provides guidelines of how the ethanol producer must create the 38-character number.  After the ethanol producer creates the RIN, it must be reported to the EPA. 

When biofuels change ownership, the RINs are also transferred.  The RINs are transferred to the refiners, importers, and blenders (other than oxygen blenders) of the fuel, who are required to blend a portion of their supply with ethanol or biodiesel. (1)  In some cases, RINs may also go to a biofuels exporter.  When ownership is transferred, a “product transfer document” is created and given to the new owner. 
 
Companies that blend gasoline for the retail market are obligated to include a quantity of biofuels equal to a percentage of their total sales of gasoline.  For 2009, EPA has set the Renewable Fuel Standard at 10.21 percent.  This percentage is computed as the industry total amount of ethanol, biodiesel, and renewable biodiesel that is mandated to be used in 2009 as a percentage of expected total gasoline use. (2)  The company uses this percentage and its gasoline volume to compute its mandated biofuels volume.  When the biofuel is actually blended into gasoline (or diesel fuel in the future), the blender turns the RINs in to the EPA to show compliance with the company’s portion of the RFS (Renewable Fuels Standard or biofuels mandate).

Excess RINs

In years when ethanol or biodiesel industry-wide blending exceeds the mandated level, as it has with ethanol in the last few years, excess RINs are generated that can be used to offset blending short-falls in future years.  These excess RINs can be sold or purchased by refiners and other blenders and used at a as credits against the mandates either in the current year or at a later time.  Alternatively, current owners of the RINs can hold them for future use.  When blending is unprofitable at some locations, some individual blenders may use their own excess RINS or buy excess RINs from anther firm and turn them in to EPA as a credit against their mandatory obligations.  This process at times allows blenders to meet their mandate requirements while not actually blending ethanol or biodiesel into motor fuel.  When it is profitable to use RINs for this purpose, it may allow industry-wide ethanol or biodiesel blending to temporarily drop below the mandated levels. 

Issuing RINs

The RINs begin at the biofuels refinery.  For each gallon of corn-starch ethanol produced, one RIN is issued.  For agri-biodiesel, 1.5 RINs are issued for each gallon.  In future years when commercial production of cellulose ethanol becomes widely available, it will receive 2.5 RINs per gallon. (3)
 
The Energy independence and Security Act of 2007 also provides a larger number of RINs for unspecified “advanced” biofuels.  The Act defines these fuels as follows: (4)

The term ‘advanced biofuel’ means renewable fuel, other than ethanol derived from corn starch, that has lifecycle greenhouse gas emissions, as determined by the Administrator, after notice and opportunity for comment, that are at least 50 percent less than baseline lifecycle greenhouse gas emissions.

The types of fuels eligible for consideration as ‘advanced biofuel’ may include any of the following:

  • Ethanol derived from cellulose, or lignin.
  • Ethanol derived from sugar or starch (other than corn starch).
  • Ethanol derived from waste material, including crop residue, other vegetative waste material, animal waste, and food waste and yard waste.
  • Biomass-based diesel.
  • Biogas (including landfill gas and sewage waste treatment gas) produced through the conversion of organic matter from renewable biomass.
  • Butanol or other alcohols produced through the conversion of organic matter from renewable biomass
  • Other fuel derived from cellulosic biomass.

It appears that these advanced biofuels can include ethanol made from wheat, barley, grain sorghum, sugar cane, sugar beets, dairy processing wastes, or other unspecified feedstocks, provided the processes involved meet the greenhouse gas reduction requirements. (5)

More about Excess RINs

In recent years, because the ethanol industry has produced more ethanol than mandated, excess RINs have accumulated.  These RINs have expiration dates.  They can be held by the blender and used any time until their expiration date.  A swap market also has developed for RINs.  In this market, blenders with excess RINs can sell them to other blenders who for various reasons may not want to blend ethanol with gasoline at this time.  These blenders can turn the excess purchased RINs in for the blending mandate requirements without actually blending the fuel.  The reason these blenders are allowed to receive credit without actually blending biofuels is that the fuel was blended in a previous time period when production exceeded the mandated level.  At that time, the excess biofuel did not qualify for the mandate. 

The value of the RINs increases as blending returns become more unfavorable and as the supply of RINs becomes tighter.

Another possible source of excess RINs comes from the biodiesel industry.  At this writing, it appears that the Congressional mandate of 0.5 billion gallons of biodiesel to be blended with diesel fuel in 2009 is not being enforced.  If it is not enforced, excess biodiesel RINs will be generated this year.  It is widely anticipated that the 0.6 billion gallon biodiesel mandate for 2010 will be enforced, so some of this year’s excess RINs may be used for biodiesel in 2010. 

It is not entirely clear whether the excess biodiesel RINs must be used only for biodiesel mandates or whether they can also be used for ethanol.  At this writing, it appears that they can be used for ethanol, but we have been unable to confirm it.  If that is correct, RINs from this year’s biodiesel production could help either the ethanol industry or the biodiesel industry to produce less than its official mandate next year.  Continued weak or non-existent profitability for ethanol plants would be a scenario under which some of the biodiesel RINs might reduce ethanol blending.

Why Blenders Sometimes Want to Blend Less than the Mandates

Reasons for wanting not to blend ethanol at certain times typically would stem from unfavorable blending economics.  That situation occurred this winter in some parts of the country.  Rack or wholesale ethanol prices this winter have been above wholesale gasoline prices in the Midwest.  An even larger ethanol-gasoline price spread has existed in areas distant from the major ethanol producing region.  Prices for ethanol on the east and west coast typically are well above those in the Midwest where most of the ethanol is produced, because of the costs involved in getting supplies from the plant to users.  At the same time, these coastal areas tend to have wholesale gasoline prices that are lower relative to ethanol because of their proximity to ports and/or petroleum refining facilities.  So ethanol blending may be economically attractive in the nation’s mid-section but not on the east and west coasts.  If or when that situation develops, coastal blenders could bid for RINs from swap dealers.  The value of the RINs increases as blending returns become more unfavorable and as the supply of RINs becomes tighter.  If the excess supply of RINs is exhausted and mandated blending levels are still not reached, blenders would need to bid up the price of ethanol to reach mandated levels.

If Cellulose and Advanced Biofuels Mandates are not met in early Years, What Happens to their Mandates

A question that could be very important to the corn-starch ethanol industry is “If cellulose and advanced biofuels segments of the industry are unable to meet mandated use levels in the next two to five years, will their mandates be transferable for corn-starch ethanol blending?”  Slow progress in developing commercial-sized cellulose ethanol plants is causing some concern that their mandated use levels initially will not be met. The mandates call for cellulose production levels indicated in the table for the 2010 through 2014 period.  Three or four pilot size plants, most with production ranging from a few hundred thousand gallons to less than 2 million gallons per year, are expected to begin operation by 2012.  A few small commercial plants may also come into production in the next two to three years, but to reach half-a-billion gallons by 2012, 16 or 17 plants with around 30 million gallons of annual capacity would be needed within two and one-half years.  At this writing, that scenario looks doubtful.  Because of the high cost of transporting bulky raw material to cellulose plants, it is anticipated that the typical size of a cellulose ethanol plant will be considerably smaller than for a corn-starch ethanol plant. (6)

If corn-starch ethanol is allowed as a temporarily substitute to fill the cellulose mandates, there is a question of whether the resulting additional RINs (2.5 per gallon of cellulose ethanol) would be allowed to be used for corn-starch ethanol even though its production would then exceed its mandates.  If so, the net effect would be a sharp increase in the demand for corn to meet the additional processor demand.  That, in turn, would have significant implications for nearly all components of Midwest agriculture, including crop and livestock farmers, corn-starch ethanol producers, farm input suppliers, lenders and other agriculturally-related businesses.

References

(1) U.S. Environmental Protection Agency Regulations, Title 40: Protection of Environment, PART 80—REGULATION OF FUELS AND FUEL ADDITIVES Subpart K—Renewable Fuel Standard § 80.1106 To whom does the Renewable Volume Obligation apply?

(2) Environmental Protection Agency [FRL-8742-5], Renewable Fuel Standard for 2009, Issued Pursuant to Section 211(o) of the Clean Air Act.

(3) John Weihrauch, “Registration, Recordkeeping, and Reporting Requirements [for RINs]”, U.S. EPA Office of Transportation and Air Quality, presentation at a Renewable Fuels Standard Workshop, May 10, 2007.

(4) Energy Independence and Security Act of 2007, PL 110-140, December 19, 2007, Sub-title A, Renewable Fuel Standard, Sections 201-210.  

(5) Ibid.

(6) Based on a presentation by Douglas Tiffany, University of Minnesota Department of Applied Economics, “Comparing Conventional and Advanced Biofuels: Logistics, Incentives, and Financial Performance” at  "Biofuels in the Midwest: A Discussion", a meeting in Chicago, Illinois on September 5-7, 2008 sponsored by the Joyce Foundation and the Woodrow Wilson International Center for Scholars.
 

 

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