Renewable Identification Numbers (RINs) are credits generated when biofuels such as ethanol and biodiesel are blended with gasoline and diesel fuel. RINs are used to show compliance with the Renewable Fuel Standard Program (RFS)—a program begun in 2005 and ramped up enormously in 2007–to force increasingly more renewable fuels into the transportation fuel market. They can be procured by purchasing renewable fuel with an attached RIN or by buying RINs on the open market. Companies that buy and blend more renewable fuel than required have RIN surpluses that they can sell at a profit to companies short on RINs.[i] But, the system is flawed in that refiners are forced to buy increasingly expensive credits because the levels of renewable fuels required are above the demand for transportation fuels. U.S. refiners are expected to pay record amounts this year for credits to comply with the RFS.
RFS and RINs
Today’s RFS requires more biofuels in transportation fuels than consumers want to buy because the RFS levels were initially determined on estimates of higher gasoline and diesel volumes than what is being demanded today. Demand for gasoline and diesel dropped in 2008 when the global recession hit and has not yet returned to pre-2008 levels. The volumes demanded today are much below the original levels expected when the RFS was passed. This forces refiners to buy RINs to meet the higher volume requirements of renewable fuels mandated by law, even though it is now clear the law was based on predictions which did not come true.
While the Environmental Protection Agency (EPA) can modify the RFS levels, the levels they set are still above the levels demanded. This year, the EPA is mandating 18.11 billion gallons of renewables be added to the transportation fuel pool, increasing to 18.80 billion gallons next year. In 2016, the percent of renewable fuel to be added to gasoline is 10.1 percent, breaching the 10 percent blend wall, which is the level that the industry deems acceptable based on regulatory and car performance levels. Many auto manufacturers will not warranty cars that use more ethanol than the 10 percent blend wall. The law is out of synch with reality but the law lives on and the EPA is enforcing it. In both 2016 and 2017, the renewable fuel levels set by EPA will breach the blend wall and refiners will have to purchase RINs.
One refinery, CVR Refining that operates two medium-sized refineries in the Midwest, spent almost $500 million on RINs since 2013, and estimates RINs will cost the refinery between $200 million and $235 million this year. Last year, the company paid $123.9 million for RINs on revenues of $938.3 million.
Major refiners like Valero Energy Corp are expected to pay record amounts this year for RINs, which hurts their ability to stay in business. In the first half of 2016, a collection of 10 refinery owners including Marathon Petroleum Corp, spent over $1.1 billion buying RINs, which means this year they should surpass the record of $1.3 billion set in 2013. Refiners without blending or retail outlets, such as Delta Air Lines and CVR, have to buy a greater percentage of RINs. The price of credits has refineries such as Valero looking to increase exports, which are not subject to the regulations, as a way to escape the costs.[iii]
When Congress passed and President Bush signed the legislation containing the RFS, demand for transportation fuels was expected to increase each year and domestic oil production was expected to decline. As a result, legislators turned to renewable fuels to increase domestic production of energy and to rely less on foreign oil imports. The advent of hydraulic fracturing changed that landscape and domestic oil production is no longer in a decline but in a renaissance that was not anticipated. As a result, renewable transportation fuels are no longer needed for the purpose first intended.
That said, there are other benefits to using ethanol (e.g. as an octane booster) that still warrants its use. These benefits, however, do not require an RFS nor do they require the EPA to increase renewable fuel volumes each year, costing the refineries millions of dollars annually that they can ill afford. The RFS needs to be modified to reflect the current production and consumption landscape for transportation fuels, rather than having the EPA tweaking the numbers each year and trying to comply with a law that has proven itself to be based upon false premises. The old saying that the only law that always lives on is the law of unintended consequences is proven with the RFS program. Unfortunately, consumers will pay for this and U.S. refining will be hurt needlessly until something is done about it.
[i] Bloomberg, Another Billionaire Bailout?, August 24, 2016, http://www.reuters.com/article/us-usa-refinery-ethanol-idUSKCN10L2F6
[ii] Hellenic Shipping News, Compliance costs undermining the goal of the US Renewable Fuel Standard: Fuel for Thought, August 29, 2016, http://www.hellenicshippingnews.com/compliance-costs-undermining-the-goal-of-the-us-renewable-fuel-standard-fuel-for-thought/
[iii] Reuters, Refiners on track to spend record on U.S. clean fuel standards, August 10, 2016, http://www.reuters.com/article/us-usa-refinery-ethanol-idUSKCN10L2F6