The Exploding RIN

Read any stories about renewable fuels in the mainstream media lately? If so, they may have focused on this year’s jump in gasoline prices – an increase that reporters often tie to ethanol.

The New York Times, for example, featured a story this spring that led with this prediction: “A glut of ethanol in the gasoline supply is threatening to push up prices at the pump…” Other newspapers followed suit, including The Wall Street Journal. In a commentary piece this summer, the Journal went so far as to claim that ethanol was costing consumers an extra 10 cents for every gallon of gasoline.

Accordingly, readers may well have been primed for a shock wave of gasoline price increases due to ethanol.

But let’s take a closer look at the math. Last spring the wholesale price of gasoline jumped 43 cents between the first two months of 2013. In March 2013, a study commissioned by Renewable Fuels Association found that ethanol mandates were likely contributing no more than $0.004 (or four-tenths of a cent) to the retail price of a gallon of gasoline – a fraction that barely budged all year.

So if the ethanol impact is less than one cent, what is prompting this alarm?

The week the New York Times article appeared, the market price of ethanol was around $2.75, or a discount of around 25 cents per gallon to wholesale gasoline. So, the Times was not referring to the physical world of gasoline and ethanol when it talked about ethanol creating pain at the pump. The Times was referring to the arcane world of Renewable Identification Numbers, or RINs.

Banking on RINs

For those new to the world of RINs, or renewable fuel credits, you might tell them it’s a lot like frequent flyer miles.

If they’re enrolled in an airline program, for example, they probably remember that each time they fly they get the physical seat for those physical miles, and they also acquire those valuable “frequent flyer miles” that they can bank for a rainy day.

Sometimes, they might be flush with cash or airfares are cheap, so they buy physical miles and bank frequent flyer miles. Other times, airfares are ridiculous, so they cash in frequent flyer miles in lieu of paying cash.

In much the same way, every time a gallon of renewable fuel is produced or imported into the U.S., the buyer acquires the physical gallon, plus a valuable 38-digit Renewable Identification Number, or a RIN. Essentially, it serves as a unique barcode identifying it as a qualifying renewable fuel.

The Environmental Protection Agency created RINs, in fact, as part of the Renewable Fuel Standard (RFS) to track the country’s progress toward the energy independence goals mandated by Congress.

A RIN credit – the serial number assigned to each gallon of renewable fuel – is transferred from one part to the next in the supply chain, until the biofuel is blended with a petroleum product. At that point, the RIN is “unlocked” from the fuel and turned into a paper coupon – an environmental credit that can be traded independently of the fuel.

Obligated parties (refiners, importers, and blenders) have to acquire and submit, each year, a mandated number of RINs to the EPA. That, in a nutshell, is the mechanism of ensuring that low-carbon renewable fuel is actually used.
In the revised standard (RFS2) there are four categories: Renewable Fuel (i.e. corn ethanol, soy biodiesel), Biomass-Based Diesel, Advanced Biofuel, and Cellulosic Ethanol – each with its own mandated volume, and not all RINs are created equal. Under the original RFS, different fuels got different RIN values based on energy content. So, a gallon of biodiesel earns 1.5 RINs compared to a gallon of corn ethanol. Cellulosic ethanol got an additional credit, earning 2.5 RINs. Under RFS2, mandated categories are separated based on greenhouse gas reduction. The extra RIN credit for cellulosic went away, but a specific volume of mandated blending was added.

In order to acquire RINs, you have to 1) purchase biofuel and blend it into regular gasoline 2) make your own biofuel, and/or 3) purchase RINs on the secondary market.

RINs are valid for two years. Some years, renewable fuel producers make a lot of fuel, and obligated parties can buy and bank the extra RINs for a rainy day. Some years, producers make less fuel and obligated parties use surplus credits to make up the shortfall — or they buy them on the secondary market, or directly from the EPA.

A shortfall of RINs

What happened this year? Well, because the 2012 drought led U.S. corn prices to spike, this was one of those years when producers made less fuel.

At current production rates, we were expecting ethanol producers to make 12 billion gallons of fuel this year — and with that, 12 billion RINs would be available. The mandate this year was for obligated parties to present 13.8 billion RINs. So there’s about a 13 percent shortfall.

That’s what this is all about: 1.8 billion RINs.

What does a RIN cost? When there’s a surplus of RINs, they effectively have little or no value. About a year ago, they were running a nickel. In May 2013, they were trading at $1.36. As a refiner, your general level of unhappiness relates directly back to the amount of RINs you have banked in your account – just like an airline customer who neglected to bank frequent flyer miles when they were cheap.

So, what’s the real impact? Some experts believe that this rise in RIN prices may actually stimulate the growth of advanced biofuels.

Among them is Bob Dinneen, president and CEO of the Renewable Fuels Association. “RINS are not raising gas prices because RINs are free,” he wrote in a recent letter to the Wall Street Journal. “Refiners and gasoline marketers can trade RINs amongst themselves to ease the compliance burden.”

“A thinly traded market is developing among refiners for these credits,” Dinneen continued, “but if refiners believe the price for a RIN offered by their competitors is too high, they could simply use more ethanol and get more free RINs! Indeed, given that ethanol is 70 cents cheaper than gasoline today, the sales of E85 and other higher ethanol blends is increasing exponentially.”

The growing value of RINS may also make biofuels a more attractive market for investors, according to Phil New, CEO of BP Biofuels.

“We’ve started to see the RIN value escalate as the market hits the blend wall,” said New this May, referring to the stage in which U.S. gasoline is saturated with 10 percent ethanol. “Now the U.S. is short on RINs, so the value of a RIN has gone up. The refiner is suddenly willing to pay a higher price to get a RIN. I think the market is doing exactly what the EPA intended it to do. With the blender now seeing value for these RINs, they have a big incentive to make it possible to sell more ethanol. What it means is there is now an incentive to put in E85 and buy molecules to help get through the blend wall.”

The effect of EPA’s waivers to allow E15, a 15 percent ethanol blend, for cars newer than 2001 is also likely affect RIN pricing.

“I’m really heartened by what we’re seeing,” New concluded. “The market is providing incentives to ensure the blend wall gets removed as an obstacle to industry growth. So it may seem really arcane, but watch that RIN price. It’s absolutely crucial.”

Oil industry unhappy with RINs

New is one of the few energy company executives to praise the RIN program, however.

“Increasingly unworkable and unrealistic” is how Bob Greco, group director for downstream and industry operations for the American Petroleum Institute, has described the RINs mandate. According to the API, the program’s volume requirements threaten to force concentrations of biofuels in gasoline above levels that are incompatible with American vehicles and fuel dispensing equipment.

“The rising costs of RINs are putting pressure on refineries, and consequently could put upward pressure on fuel prices,” said Greco at a press conference this spring.

Greco cited a study the API commissioned that asserted the Renewable Fuel Standard would cause severe economic hardship by 2015, including a $580 billion decrease in take-home pay for American workers due to ripple effects from the rising cost of transportation fuels. Over the next two years, the report added, RFS mandates would also usher in a 300 percent increase in the cost of diesel, a 30 percent rise in the cost of gasoline, and possible gas rationing.
Greco has also criticized the Environmental Protection Agency because some purchasers of biodiesel RINs were defrauded by vendors implicitly approved by the EPA. The names of the firms were listed on the EPA’s website, and at least one could be found there even after the EPA began investigating the owner. The fraudulent sales, Greco noted, involved more than 140 million “bogus RINs,” a problem, he has said, that threatens to undermine the entire RFS program (See sidebar on RIN fraud.)

Pain at the pump

Timothy Slating, an attorney with Energy Bioscience Institute’s Biofuel Law and Regulation Project at the University of Illinois at Urbana-Champaign, asserts that the problem with RIN fraud is exaggerated.
Like New, Slating believes that soaring RIN prices give refiners more incentive to develop advanced biofuels.

“RFS mandates will exceed the E10 blend wall this year,” he said. That means refiners and other obligated parties will have to purchase RINs on the secondary market to comply with their obligations under the law, he added. “Competition for RINs will drive up the price, something that could provide a profit motive to commercialize E85, a blend of up to 85 percent ethanol and 15 percent gasoline. Fuel blenders could profit by acquiring RINs and selling them in the secondary market.”

RIN profit could offset the cost of ethanol and E85 if the RIN price is high enough, according to Slating. “At current oil prices, this will work if RINs are worth at least 80 cents each, and we have to remember that RINs hit a record price of $1.36 this year, but they will offset costs if they are worth at least 80 cents each. At this high price, fuel blenders could get about $1.02 RIN value per gallon of E85, which typically contains about 75 percent ethanol on average.

“Fuel marketers and retailers could also begin to educate consumers on the economic and environmental benefits of purchasing E85,” he added. To complicate this, the average consumer isn’t aware that he has to buy 25 percent more E85 to go the same distance as he would using E10. That means that he should be paying 25 percent less at the pump for E85.

These advanced biofuels depend largely on the existence of the Renewable Fuel Standards mandates, which are under fire by groups lobbying the EPA for mandate waivers to ease pressure on food prices for consumers and livestock.
However, a study by UN economist Seth Meyer and economist Nick Paulson of the University of Illinois found that the RFS mandate had only a limited effect on current corn prices. In an article for Farm-Doc Daily, they noted that other studies also found that “blending economics, rather than the mandate, continue to drive ethanol use despite significantly higher corn prices resulting from the 2012 drought.”

Economist Philip K. Verleger agrees. “The obvious solution to the RIN price problem involves no EPA intervention and no regulatory action at this point. It simply calls for boosting E85 sales,” he writes in a study called “The Price of RINs: How High! How Stupid!” Pointing out that enough E85 is sold to allow the Oil Price Information Service to compute a national price average, he concludes that refiners and marketers could meet their RFS requirements by simply boosting E85 sales.

And – as Phil New predicted – high RIN prices also appear to be an incentive for oil companies to invest in biofuel plants themselves. “‘Big Oil’ can either pay the RIN ‘tax’ to some other firm, it can buy that other firm and pay the RIN ‘tax’ to themselves,” said Robert Wagner on the investment site Seeking Alpha. “Ethanol RINs have fallen back below $1 but the economics are still very much in favor of buying up biofuels plants.” On August 14, in fact, Ethanol Producer magazine announced that Marathon Petroleum Company (MPC) has recently bought an interest in three ethanol plants.

Unfortunately, the truth about RINs is not getting out. People don’t like pain at the pump, and they look for a fall guy. And unless the media does a better job of educating consumers about the real reasons for gas price hikes, RINs may continue to fit the bill.

Editor's note: As the issue went to press this November, the price of RINs has dropped to 25 cents after news of the EPA's proposal to reduce the minimum amount of ethanol required to be used in the country’s gasoline supply in 2014. Renewable fuel advocates are fighting the proposed change to the RFS. One of the top E85 producers, Mike Irmen, told Reuters that the EPA proposal, if implemented, “will not kill [E85], but it would certainly stifle it.” The EPA is inviting public comment through January 28, 2014, after which it will make a final decision.

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