Will RINs be the Next Environmental Currency?

Renewable Identification Numbers are becoming increasingly important not just for people in environmental compliance or accounting, but also for those in marketing, investing and sustainability.
By Anduin Kirkbride McElroy | April 15, 2008
Passage of the Energy Independence & Security Act of 2007, and the dramatically increased renewable fuels standard (RFS) within it, took renewable identification numbers (RINs) from a necessary pain to a marketable commodity. Between December and February, the value of RINs grew from 0.25 cents to 5 cents, according to Paul Machiele, fuels center director for the U.S. EPA. The program is in its infancy and RINs aren't well understood, but initial indicators show that they have the potential to be a significant environmental currency.

RINs are mechanisms the EPA created to ensure compliance with the first RFS. The Energy Policy Act of 2005 mandated that obligated parties, which include refiners, importers and gasoline blenders, fulfill a renewable volume requirement. The requirement is that a certain percentage (released by the EPA every November) of each party's motor vehicle fuel be renewable fuel. This necessitated the development of a flexible accounting mechanism to track compliance with the new renewable fuel blending requirements. A RIN is a unique, 38-digit serial number assigned by producers to each gallon or batch of renewable fuel produced. An obligated party acquires RINs by blending renewable fuel, or it can purchase RINs to satisfy its requirement.

The EPA issued the final rule on RINs in May 2007, and it went into effect that September. Just three months later, long before the kinks were worked out, Congress passed EISA along with an even greater and more complex RFS. EISA requires that the EPA issue a rule for the second RFS by Dec. 19, 2008, which would be effective by Jan. 1, 2009. The EPA is simultaneously enacting the rule while updating it within what Machiele told attendees at the National Ethanol Conference in February is an extremely short time frame. He gave the same presentation at the National Biodiesel Conference earlier in the month.

The beauty of the RIN system is that it was developed as a foundation upon which other regulations could be built. Machiele said the RIN system should remain virtually intact with 38 digits, but the values of some of the digits may need to be redefined.

In the first RFS, the EPA needed to keep track of two types of fuels: cellulosic ethanol and everything else. The renewable type code is the 22nd digit-cellulosic ethanol is designated as a 1 and other fuels are designated with a 2. This ensures that the cellulosic requirement will be met. Under the new RFS there are more numbers that must be tracked. In addition to cellulosic biofuel, EISA has separate inclusion requirements for biomass-based diesel and advanced biofuel. "With RFS1, we put in a code to prepare for cellulosic ethanol," Machiele said. "With RFS2, instead of 1 or 2, we'll now have 1-4. There will still be one RIN code, but the RIN will have a different value." The difference in these numbers will be reflected in the RIN's market price.

Fuels other than corn-based ethanol have qualified for RINs by equivalence values, which are represented by the 20th and 21st digits. Equivalence values are based on volumetric energy content in comparison with corn ethanol, and determine how many RINs the fuel is worth. For example, 1 gallon of biodiesel is worth 1.5 RINs, while 1 gallon of corn ethanol receives one RIN. For fuels not already designated within the rule, the EPA created a formula to determine the energy equivalence value of those fuels compared with corn-based ethanol. This makes an easy transition to accommodate the advanced biofuels required in the second RFS.

The advanced biofuel requirements can be built into the existing system, but there are other more difficult changes the EPA is addressing. Machiele said one of the greatest
challenges, on which most of the EPA's time will be spent, is the new lifecycle greenhouse gas criteria. EISA requires that renewable fuels meet a 20 percent lifecycle greenhouse gas threshold relative to the gasoline or diesel fuel they displace. The EPA must determine the lifecycle performance of the various fuels, and will address how to include emissions resulting from international land-use changes.

"If you thought RFS1 was interesting, RFS2 will have you on the edge of your seats," quipped Jim Redding, vice president of external relations for Aventine Renewable Energy Inc.

RIN Markets and Values
While these changes to the rule are being discussed among stakeholders, RINs on today's market are increasing in value, and are seeing trade activity. Several companies have sprouted to accommodate RIN trading. On Jan. 30 of this year, a trading platform for RINs opened, called RINXchange. RINXchange is a Web-based trading platform that enables buyers and sellers complete transparency and price discovery. It's open to the expected customers, such as producers, refiners, blenders, marketers and importers, as well as the occasional speculator. Like RIN trading in general, this trading platform is still in its infancy. "The lion's share of RINs is currently traded on a bilateral basis," says Clayton McMartin, president of the Clean Fuels Clearinghouse, which operates the RINSTAR Renewable Fuels Registry. "They're being traded as direct negotiations from buyer and seller. By a long margin, most RIN transactions are being done as an extension of the physical product that's being traded." He adds that his company's product, RINSTAR, facilitates RIN transactions, but it doesn't get involved with price discovery.

As previously mentioned, RIN values have increased since the passage of the 2007 Energy Bill. Future RIN values will certainly be affected by availability, but likely even more so by type. For example, when the new RFS goes into place, there could be a premium paid for biomass-based diesel RINs. In 2009, obligated parties must blend 500 million gallons of biomass-based diesel. Because the parties must own this type of RINs to demonstrate compliance, there will most likely be a premium paid for the RIN generated from biomass-based diesel.

To keep the market from spinning out of control, the EPA has a relief valve. The agency will have the authority to mint RINs or waive the requirement under certain conditions. The cellulosic biofuel waiver, required in the legislation, allows the EPA to reduce the standards for advanced biofuel and total renewable fuel accordingly, and to make EPA credits available for sale at the greater of 25 cents per gallon or $3 per gallon less the wholesale price of gasoline. At today's prices, this equates to approximately 70 cents per

There's a wild card that may or may not affect RIN values, McMartin says. "It hasn't developed yet, but it could." He points to other markets, where companies, academic institutions and government entities voluntarily purchase renewable energy credits or join the Chicago Climate Exchange to reflect sustainability values. "To date, RINs have not been recognized as a vehicle from a sustainability or environmental stewardship motive," he says. "If they are, that will drive the value of RINs. For instance, a sustainability purchaser buys RINs, takes them off the market and doesn't make them available to obligated parties. That increases the market for RINs." At RIN prices of about 3 cents, a fleet manager could offset the annual fuel consumption of 1,000 vehicles for just $30,000, he says.

If it goes forward, McMartin says environmental stewardship purchases would drive the value of RINs more than anything else. If not, RIN value will likely be dictated by simple transportation logistics. "Unless there's a new dynamic like sustainability or another environmental wild card, RINs will likely stay in the 3- to 5-cent range, a number driven by transportation costs," he says. "It costs nothing to move a RIN, but it costs to move a gallon of gasoline-about 3 to 5 cents."

Carbon Credit Exchange
The RIN system may also be the foundation of a carbon cap-and-trade system. RINs could act as the currency for carbon credit trading and compliance, just as they do now for renewable fuels, Machiele said. This scenario may become reality as soon as 2012 if proposed legislation is enacted. In October 2007, Sens. Joseph Lieberman, ID-Conn., and John Warner, R-Va., introduced Senate Bill 2191 as America's Climate Security Act. It creates an economywide greenhouse gas cap-and-trade program that provides maximum flexibility for the marketplace to meet a level of emission reductions that is environmentally credible. In December, by a vote of 11-8, the Senate Environment and Public Works Committee favorably moved the Lieberman-Warner Climate Security Act to the full Senate with a bipartisan list of cosponsors. This is the first time in the United States that a bill mandating economywide reductions in greenhouse gas emissions has reported out of committee in the Senate or the House. According to Lieberman's office, the full Senate is expected to consider the measure in June.

The fact that RINs could be used in a carbon cap-and-trade system didn't happen by accident. Before Congress passed the Energy Bill, Machiele's team at the EPA was working on a metric for carbon levels, as part of a U.S. Supreme Court interpretation of the Clean Air Act that carbon dioxide is an environmental pollutant.

"I think it goes beyond the boring compliance," says Douglas Cummins, managing director of RINXchange. "The EPA created the market by separating the person who generates the RINs from the person who has to use it. Usually, EPA doesn't create a system without it being applied to another product." McMartin explains how the same equivalence values and renewable type code previously described could be used to move RINs from a volume-based program to a carbon-based program. "Today's RFS is an energy-content based
standard," he says. "Instead of being based on energy, it could be based on carbon impact. The way the program is set up today, only three numbers would have to change."

McMartin is careful to admit that this is just his own educated guess. "I have no idea, nor does anyone else, what the future holds on fully integrating cap and trade with the RFS and RIN program," he says. "My guess is the RIN program will continue to expand to even encompass stationary sources like power plants. There's no reason it can't. The EPA is pretty sharp on this. You could tell they were anticipating changes and made accommodations on RIN numbering and programming to accomplish that."

Anduin Kirkbride McElroy is a Biodiesel Magazine staff writer. Reach her at amcelroy@bbibiofuels.com or (701) 738-4962.
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