When Conservation Results in Tying the Economy into Knots

July 8th, 2014
in Op Ed, syndication

Random Thoughts from the High Desert

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GEI recently ran a very good article submitted by the Congressional Budget Office (CBO) on the issues raised by the renewable fuel standard (RFS) mandate in the Energy Independence and Security Act of 2007 (EISA) as it applies to gasoline and diesel fuel. The article can be found here. The focus of that article was the probable impact on corn prices, food prices, and gasoline and diesel prices.

Tom Fool Knot

Follow up:

Although those are very significant issues to address, I was intrigued by the term RIN which showed up multiple times in that article and the full paper and it made me curious as to how that system worked and why it seems to have the system of producing gasoline and diesel fuel tied up in a Tom Fool Knot otherwise known as handcuffed.

Introduction to Alternative Fuels

To start with we need to look at the requirement for blending alternative fuels into gasoline and diesel. This is shown here from the original legislation which is described here:


Notice there are four different categories of alternative fuels.

  • Other advanced biofuels (includes the two non-starch-based ethanol categories plus any other alcohols). So this is a catch-all category which can be used for any purpose
  • Bio-fuels used specifically in diesel (vegetable oils and animal fats and algae)
  • Ethanol made from vegetable cellulose
  • Ethanol made from corn starch

Note also importantly the requirement is in terms of a fixed number of gallons of these renewable fuels produced. Also the requirement does not address the probable availability of this amount of renewable fuel.

This has proved to be problematic because some of these inputs are difficult and expensive to produce for example cellulosic biofuels.

Cellulosic Fuels

This could lead to the ridiculous situation of the U.S. being forced to import a large amount of sugar-cane ethanol (a cellulosic biofuel) from Brazil. This might require Brazil to increase its production of sugar-cane-based ethanol by 45%, exceeding that country's production capacity. This could result in the necessity of the U.S. shipping corn-starch-based ethanol to Brazil. Now that is an exercise in futility which would clearly waste a lot of energy on transportation and increase transportation related GHG (green house gases).

A more significant problem is that Americans are driving less and have a fleet that provides higher MPG.

Consumption of blends simplified

This means that the percentage of these alternate fuels blended into gasoline for general use would under one scenario for dealing with the problem need to gradually increase way beyond the 10% that is in E10 in order to meet the EISA requirement. This higher ethanol content would not be safe for many older vehicles in the fleet. Another possible solution would require a greatly expanded use of a high renewable energy fuel such as E85. Not many existing vehicles are equipped to utilize and not many service stations are equipped to dispense E85. A lot of capital investment would be required to achieve this.

In order to deal with these and similar problems, the EPA has eased the requirements and in some cases sold waivers. They were able to do this because:

"Waivers, reductions, and modifications to the RFS2 are allowed if the EPA determines that the standard would severely harm the economy or environment, or that there is an inadequate domestic supply. EPA must reduce the cellulosic biofuel mandate if projected cellulosic production is below the mandate. Additionally, authority for adjusting the biomass-based diesel fuel mandate based on price-based considerations is provided for in the EISA."

As a result of such modifications, the resulting and projected requirements now look like this:

Simplified Alternative Fuel Requirements.

Modifications made in 2011 and 2012 are visible deviations from the initial growth curve. But it is a losing battle as beyond starch-based-ethanol, there is very limited U.S. production of the other two non-starch-based renewable fuels which over time have increasing requirements.

What is a RIN?

All of this made me wonder how the system was implemented and what in the world was a RIN. Well, here is what a RIN is:

"To monitor suppliers’ compliance with the requirements, EPA assigns a unique “renewable identification number” (RIN) to each qualifying gallon of renewable fuel. Every RIN includes a code that identifies which of the four RFS categories—total renewable fuels, advanced biofuels,cellulosic biofuels, or biomass-based diesel—the gallon satisfies. Each fuel supplier, regardless of what kind of fuel it produces or imports, must meet all of the blend requirements for a given compliance year. The supplier can do that by using the required amounts of renewable fuels itself and submitting the corresponding RINs to EPA to demonstrate compliance, by purchasing RINs from other suppliers that have excess RINs to sell, or by submitting RINs that it acquired in the previous year and saved for future use."

Two examples of a RIN are 12008650270076000011020000000100000792 and 22008650270076000011020000000100000792. One code indicates that it is being used by a blended product and the other indicates it is not assigned and thus able to be traded. Can you tell which is which? You can imagine how easy it is to make an error when entering a RIN and thus subjecting a company to a significant fine. One might also wonder how the EPA is able to keep track of these numbers. It reminded me of when I started my career and was involved with what we called Hamming Codes. Inclusion of error detection and correction digits might reduce the problem with errors and counterfeiting.

We keep better track of RINs than we do of currency as there is no database of serial numbers for currency That is correct! The U.S. Treasury has no idea of what currency serial numbers are in circulation. I have met with the Secret Service on this and they acknowledge that even when currency is destroyed there is no attempt to record the serial numbers of those bills. It seems the folks at the U.S. Bureau of Engraving and Printing do not wish to have their works of art compromised by bar codes or other ways to have serial numbers easily recorded by ATMs and other pieces of equipment that process currency.

To turn the above official cryptic explanation of what is a RIN and the rules related to RIN management into something easier to understand, consider the following explanation:

To produce gasoline you need to have a certain number of RINs. There are three kinds and the blends are the way this is enforced. Read the full CBO report that is linked at the bottom of the article Econointersect ran. It shows how the price of gasoline and diesel is influenced by the cost of RINs.

You get RINs by purchasing certain EPA approved renewable non-petroleum based fuels such as but not limited to starch-based ethanol (usually from corn). You need to send RINs to the EPA to blend gasoline into your product or pay Clean Air Act (CLA) fines. The rules for what kind of renewable fuels and thus the type of RINs you need are set by law which calls for changes over time requiring more complex renewable fuels and their associated RINs (e.g. RINs made from processing stover rather than corn starch) and an increasing percentage of the more complex and presumably more environmentally friendly renewable fuels and thus the associated RINs.

So as a producer of gasoline or diesel you get RINs when you buy ethanol or other approved alternative fuel and you need to send the certificates to the EPA when you sell any fuel that includes gasoline or petroleum-based-diesel. So the production of fuel that includes gasoline or diesel is subject to a tax payable with RINs. This makes me think of the MMT (modern monetary theory) view of money and taxes: The need to send RINs to the EPA gives them value. Each RIN has a serial number which means each gallon of ethanol purchased has a unique identifier to prevent counterfeiting of RINs. We keep better track of RINs than we do of currency but fraud with respect to RIN's has occurred. It is the responsibility of the buyer of a RIN to know if it is legitimate and it is the responsibility of the blender of gasoline and diesel to know how many RIN's are owed to the EPA and provide them on a timely basis.

A Market for RINs

What does the RFS mean in practice? This is an example of the impact for 2017 if the full requirements of EISA are required to be met.

"with the hypothetical requirements above, each fuel supplier would have to submit 14 RINs (including 4 for advanced biofuels and 2 for biomass-based diesel) for each 100 gallons of gasoline or diesel that it sold. Suppliers with excess biomass-based diesel RINs could either sell them or apply them toward their advanced-biofuel requirement.

In the earlier years, the requirements were fairly moderate so that blenders accumulated RINs through simply blending E10. But now the requirements for submitting RINs to the EPA exceed what most blenders receive from their normal purchases of starch-based-ethanol. Blenders of E85 have excess RINs but there is not much blending of E85. There may be some purchasers of ethanol for non-fuel applications that receive RINs but do not blend gasoline or produce diesel and thus are not obligated to provide RINs to the EPA and can just sell them. And there are RIN brokers. The most common category, D6, trades on the NYMEX. Also, the EPA sells RINs (officially called waiver credits) a nice side business. Also it turns out that the EPA can waive any of the provisions of EISA. That is what has prevented EISA from bringing gasoline production to a halt and which may result in the repeal or modification of EISA.

One goal apparently of EISA was to encourage the production and use of E85. E85 benefits the blender because they receive 75 RINs per 100 gallons of E85 and only use 25 RINs if it is 75% ethanol based E85. (In practice E85 is not 85% ethanol). So the blender ends up with 50 RINs to sell. With E10 you get 10 RINs but you need 90 RINs so you have to buy them from someone. Other goals of EISA were to encourage the production of ethanol produced from cellulose and vegetable-oil-based and animal-fat-based renewable fuels. Unfortunately the only renewable vegetable-based-fuel produced in any quantity is ethanol from corn starch so as the more stringent requirements of EISA kick in, they are impossible to be met.

The complexity of this system also raises the question of whether or not this system can be tampered with and create a problem for example by having some entity buy up the excess RINs and thus put the refineries out of business by making it impossible for them to purchase RIN's from third parties. One may only have to buy up one category of RINs to do that and create an emergency. Do it when Congress is out of session and the production of transportation fuels could come to a screeching halt. Corruption of the EPA database covering RINs would be another potential problem. But the fact that the EPA can waive requirements and even sell or give away waiver credits makes this scenario unlikely but still possible if the computer systems involved fail or are compromised. The more likely scenario is simply the creation and marketing of fraudulent RINs. There is essentially no system in place to determine if a RIN is legitimate or counterfeit.

And, finally, what might happen during a government shutdown?


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