In previous briefings we covered the fact that Renewable Identification Numbers are utilized to track renewable fuel through the supply chain, but ultimately RINs are used to demonstrate compliance. Companies identified by EPA as “obligated parties” must meet the mandated standards in order to remain compliant with the federal law.
The typical obligated party is a company that refines crude oil and produces finished gasoline. By far the biggest portion of obligated parties are refiners, such as ExxonMobil, ConocoPhillips, Valero, BP, Shell, and Chevron. Other companies that fall under the RFS obligated party classification would be importers of gasoline into the U.S. as well as companies that buy petroleum intermediate components and blend at facilities like fuel terminals to produce finished gasoline.
Under the regulations, each of these obligated parties is then bound by the law to use their pro-rata share of renewable fuel. Recalling that the RFS is really a percentage established each year (see Briefing #1 What is the Renewable Fuel Standard?), the company multiplies their on-road gasoline production (1) times the RFS to determine their obligation. This is called their RVO or renewable volume obligation.
Obligated parties demonstrate to EPA that they have met or exceeded their RVO by the submission of RINs each year. These RINs can be acquired through the process of purchasing and blending renewable fuel into their own pool of petroleum products or by acquiring RINs from another party that has blended renewable fuel in excess of their RVO and is willing to sell their RINs to the obligated party. As you can see, central to the RFS program are provisions for credit banking and trading, with the RIN serving as the paper credit for this purpose.
TRACKING
The RFS regulations require that accurate records pertaining to RIN activity be maintained and summary reports submitted to the Environmental Protection Agency each quarter. In principle this is a simple concept; in practice it is much more complex.
As title to product, when the associated RINs are transferred from one party to the next the supplier (transferor) is required to generate and deliver documentation to their customer (transferee). As the transferee then sells to their customer, and so on down the line, the same type of documentation is required each time title is transferred. Now that each of these events has been documented, each party is required to keep the records in an organized manner and report to EPA every quarter on their activity. These standardized reports are due two months after the quarter closes (2). EPA staff members can then process the data to track the movement of renewable fuel through the supply chain and determine if all parties are in compliance.
EPA utilizes a post-audit approach to the program, where they gather data pertaining to literally millions of transactions and then process, looking for discrepancies and inconsistencies among the data. The shortcoming of this approach is that possible violations are revealed months after they have occurred, making for considerable challenges in the area of enforcement and overall exposure.
An alternative approach is for companies to voluntarily participate on the renewable fuel registry where they take a proactive approach to RIN tracking and validation. By utilizing a third party verifier, companies are able to manage massive amounts of data on one standardized computing system (3). Through a centralized registry, companies are also able to conduct a more thorough job of due diligence and minimize ownership issues before they occur. The RIN program is “Buyer Beware” and any liability resulting from title defects fall to the current owner.
(1) Future View: Under the RFS2 the program basis is extended from only on-road gasoline to now include non-road, locomotive, and marine fuels. Additionally, the RVO will be broadened to encompass four separate standards. With RFS2 come four categories of mandated fuels, resulting in four different standards each year. More details about these four different standards and how the program will work will be provided in future RFS Educational Briefings.
(2) Future View: As discussed in Briefing no.2, the reporting frequency will increase under RFS2, first to monthly then to within three days of the transaction.
(3) Future View: EPA has proposed a centralized and closed system for clearing RIN transactions known as the EPA Moderated Transaction System (EMTS). EPA has stated that they hope to bring increased confidence to the marketplace with EMTS – schedule to go into effect in 2011. More details will be provided about EMTS in future briefings.
Past briefings providing more background information are available now at www.CFCH.com.
Clayton McMartin is the President of the Clean Fuels Clearinghouse and the founder of the RINSTAR® renewable fuel registry. Hundreds of companies process renewable fuel and RINs on RINSTAR® each day. More information about the company is available at www.CFCH.com or by calling (575) 377-3369.
