Easy Peezy Lemon Squeezy: The Ins and Outs of the Renewable Volume Obligation

May 13, 2020

After reading the title to this article, I suppose you’re expecting to see a lot of regulatory and legal hieroglyphics. Plot twist. I’m going to explain the regulatory purpose of the Renewable Volume Obligation (RVO) in a way that makes sense and can include you in the industry conversation like the cool kid you are. #trendworthy.

So what is the RVO and why should you care? Overall, the Renewable Volume Obligation is the volume of renewable fuel, in gallons, that must be blended to produce transportation fuel. On an individual level, the RVO is the regulatory duty (obligation) an importer or refiner of nonrenewable fuel (e.g., gasoline, diesel) incurs as a result of their day-to-day business activities. By mandating this obligation, the federal government is attempting to disincentivize the continued refining and use of fossil fuels (nonrenewable fuels, such as gasoline and diesel), to be made into transportation fuel. Refiners and importers, as a result of their day-to-day business activities, go against the federal government’s wishes and, as a result, have to pay for it. The businesses that incur an obligation are called, predictably, obligated parties. Makes a lot of sense, right? An obligated party incurs…wait for it…an obligation. See? This isn’t that hard.

By now you’re thinking that an obligation needs satisfied right? Right. EPA only requires the very small sacrifice of your first born. Totally joking, EPA is not in the business of taking other people’s children. In order to incentivize the production and blending of renewable fuels, the federal government requires that the obligated party (remember, that’s the company that incurred the obligation) to replace, gallon for gallon, the volume of nonrenewable transportation fuel with renewable transportation fuel. The way this works is an obligated party has to obtain intangible credits called Renewable Identification Numbers (or RINs) and retire (essentially, count against) their incurred obligation. There are, very generally, two different approaches to accomplishing this regulatory requirement: (1) a business can produce and blend renewable fuel, separate the RIN and retire it, keeping the entire operation to themselves or (2) purchase the RINs on an individual basis and retire them, without engaging in any actual blending of renewable fuel.

You’re wondering what a RIN is, aren’t you? A RIN is an intangible credit that is attached to a gallon of renewable fuel. While you can’t touch or see a RIN, think of it like a sticker on the side of the gallon. Once that gallon of renewable fuel is blended with gas or diesel to be used for transportation fuel, the RIN is detached, or separated, from the gallon of renewable fuel (like peeling the sticker off the side of the gallon). As you might expect, the regulations refer to a RIN that is no longer attached to a gallon of renewable fuel as a separated RIN. The separated RIN can then be traded among blenders and obligated parties, until it is used to retire against an obligation. You can do this, I promise! At least that’s what my parents keep telling me about remaining gainfully employed and out of their basement. #millenialproblems.

So to recap, an obligated party incurs an obligation that has to be satisfied. The only way to satisfy that obligation is to retire the things called RINs against that obligation. RINs can be traded among different participants but only once they have been separated from the gallons of renewable fuel. Now you’re cooking with gas! …or biodiesel…