Though a source of confusion for some, and admittedly complex, the Renewable Fuels Standard uses a combination of Renewable Identification Numbers and Renewable Volume Obligations for proper implementation.
The system involves consumers, blenders and now traders on the open market, but it all stems from the RFS.
According to the Energy Information Association, the RFS, a regulation that mandates certain amounts of biofuels must enter the petroleum-based fuel market, was first implemented in 2005 and revised in 2007.
Currently, the regulation calls for blending of 36 billion gallons of renewable fuels into the fuel supply by 2022, and EIA says this is where RVOs come in.
First, the volumes for the four RFS categories – cellulosic, biodiesel, advanced and total – are assigned to refiners and importers of gasoline and diesel using RVO percentages. RVOs are calculated by dividing each RFS target by the total estimated supply of non-renewables in the fuel supply.
Targets for 2013 are cellulosic, 0.0008%; ethanol equivalent for biodiesel, 1.12%; advanced biofuels, 1.6%, and total, 9.63%.
Once obligated parties have been assigned targets, they must account for their obligations by surrendering RINs – a 38-character number assigned to each gallon of renewable fuel produced or imported – within 60 days of the end of the year.
The confusion arises with the stipulation that RINs don't have to be used the year they are generated. Up to 20% of a year's RFS mandate can be met with RINs generated the year before.
Further, when renewables are blended or sold as 100% biofuels, RINs are separated from the physical biofuel and can be used to comply with the year's mandate or traded to other parties for their compliance.
"Obligated parties have the option to either acquire RINs by purchasing and blending physical quantities of biofuels, or by purchasing already separated RINs and submitting them to the EPA for compliance," EIA explains. That means that in addition to being used for RFS compliance, RINs have a standalone value that represents an economic incentive to use biofuels.
From 2006 through much of 2012, the RIN value was close to zero, because it was economical to blend up to or above the level mandated by the RFS. But when RIN prices increase, blenders are encouraged to blend more biofuel because they can sell the RIN and the physical fuel.
RIN prices impacting consumers, corn producers, some say
Recently, RIN prices have increased considerably, causing petroleum groups to point a finger at the RFS for making ethanol production higher than what is needed in the marketplace. In turn, they say, the so-called "blend wall" – a cap on the amount of ethanol that can be blended into traditional fuels and still be sold – is boosting RIN demand and driving prices higher because of compliance concerns.
Petroleum groups have also expressed concern that the rising RIN price is driving up consumers' fuel costs. Sens. David Vitter, R-La., and Lisa Murkowski, R-Alaska sent a letter to EPA Director Nominee Gina McCarthy in March requesting a plan to "protect American citizens from rising gas prices due to the rising cost of ethanol Renewable Identification Numbers."
At the height of the 2012 drought, livestock producers were also concerned about the future of RFS requirements. They said that rising corn prices due to short supplies left them to compete with blenders for a smaller amount of corn.
Another issue in the mix is ongoing concern about RIN integrity, which earlier this year led the Environmental Protection Agency to develop a program to verify RIN validity.
For more, view the University of Illinois Farmdoc post, High Gasoline and Ethanol RINs Prices: Is There a Connection?