May 13, 2020
What the heck is a RIN? How does the Renewable Fuel Standard actually work? When I first started with RINAlliance, I remember thinking it sounded like having an imaginary friend: beneficial sure, but people looked at you funny when you talked about it. To this day, my parents aren’t sure what I do is real, but since I’m not living out of their basement, they’re fine with it. #millenialproblems.
I only have two pages, so I have to dive right in. The Renewable Fuel Standard (RFS) was the grandchild of the much bigger and more well-known Clean Air Act from the 1970’s…way before I was born. The RFS is, essentially, a system set in place by the federal legislature designed to incentivize the production and integration of renewable fuels into the transportation marketplace. To facilitate this goal, the federal legislature passed the Energy Policy Act of 2005 which gave the biofuels industry the first iteration of the RFS (“RFS1”). Then, in 2007, to address some industry concerns, the federal legislature passed the Energy Independence and Security Act (EISA), which gave the industry the second version of the RFS (“RFS2”). This second version is still the most current version of the RFS and is known to most as RFS2.
Cool, cool, cool…so now that we’ve made it passed the history lesson, how does this whole thing work? Well, it’s pretty easy to understand. The RFS requires that a certain number of gallons of renewable fuel made from various types of feedstocks be infused into the transportation market. This requirement is collectively known as the Renewable Volume Obligations (RVOs). Each year, U.S. EPA sets the RVOs as a benchmark for the production and use of renewable fuel. The RVOs help drive the fuels industry in terms of production, blending, and marketing renewable fuels.
While EPA sets annual RVOs for the industry as a whole, every entity engaging in a business activity that runs contrary to the purpose of the RFS incurs an individual RVO. These types of entities that engage in this type of activity are known as Obligated Parties. This is pretty easy to remember because an Obligated Party, as a result of their business activities incurs…wait for it…an obligation. I told you this was easy to understand!
This is where RINs come into play. A RIN is an intangible credit that is used as a measure of compliance. When a gallon of renewable fuel is produced, a RIN is generated (created) and then assigned to the gallon of renewable fuel (termed an “assigned” RIN). In this way, each assigned RIN is a representation of a gallon of renewable fuel that has been produced. Think of it like a sticker being attached to the gallon of renewable fuel. When that gallon of renewable fuel is blended to produce transportation fuel, the RIN is separated from the gallon (termed “separated” RIN) and able to be traded among RFS participants. In essence, once that gallon has been blended, the RIN “sticker” is peeled off the side of the gallon to be freely traded.
But wait! There’s more! Obligated Parties (remember, business entities incurring an obligation), need RINs to show that they have met their obligation for the compliance year. Obligated Parties do this by retiring (taking out of market) RINs against their obligation. Generally speaking, there are two ways that an obligated party can do this. First, they can blend renewable fuel to produce transportation fuel themselves. Alternatively, as a second option, they can purchase RINs on the open market and retire them against their obligation. In both scenarios, RINs are used to indicate an Obligated Party has met their annual compliance obligation. In this way, RINs are a direct mechanism of compliance. See? I told you this wasn’t that difficult.