The Renewable Identification Number (RIN) system, a tracking program for biofuels, has a reputation for complexity that's well deserved, even according to the people who make their living studying it. "I've been working on it for two years and I feel like I'm beginning to understand it," Environmental Protection Agency acting assistant administrator Janet McCabe admitted to U.S. lawmakers in June.
The basic structure of the RIN system is fairly straightforward. Biofuel makers generate a unique 38-digit tracking number for every gallon of fuel they produce, and oil refineries collect the numbers when they blend biofuel into gasoline. Regulators then inspect refineries' RINs to verify that they're meeting their blending obligations under the Renewable Fuel Standard (RFS).
That's where things get complicated. Not all biofuel users have to demonstrate RFS compliance, and those that don't can spin off their RINs as separately tradable commodities. That allows refineries to prove compliance by buying RINs on the open market, in much the same way that polluters buy emissions credits under cap-and-trade systems.
The RIN market buoys the value of biofuels, helping fuels such as ethanol to stay competitive even when gas prices dip. It also gives regulators a tool with which to shape the sector: by tweaking RIN quotas, regulators can encourage the use of specific biofuels. When they work as intended, RIN trading can "drive investment in new technologies and infrastructure to allow higher-level blends to be sold," says Bob Dinneen, president and CEO of the Renewable Fuels Association.
But things don't always go according to plan. The EPA lets biofuel producers generate RINs with little oversight, and there have been scandals in which millions of dollars' worth of RINs were sold for biofuels that never actually existed. The EPA takes a "buyer beware" approach to RIN sales, and has punished firms that unknowingly bought bogus RINs.
That hasn't slowed the RIN market, which remains highly volatile, with uncertainty over renewable-fuel policies leading investors to trade large volumes of RINs. The unpredictable ebb and flow of RIN prices makes the entire Renewable Fuel Standard less effective than it should be, argues Harvard economist James Stock, who recently called for a floor-and-ceiling "collar" on RIN prices to promote responsible investment.
The oil industry criticizes the RIN system on similar grounds, arguing that speculation inflates their operating costs and hurts motorists. In June, however, the EPA dismissed such objections in a detailed analysis of a 2013 price spike that drove RIN prices up 1,400 percent. While oil refiners paid $1.35 billion that year to cover their RIN purchases, they eventually recovered their costs without increasing prices at the pump, the EPA found.
While the RIN market hasn't seen a repeat of 2013's frantic trading, a fresh wave of speculation preceded the EPA's recent update to refineries' RFS blending quotas, followed by a slump to about 30 cents per credit when the quotas were finally published. Some analysts fear the agency's low targets, combined with record ethanol production in 2014, could create a RIN glut, leaving refineries able to meet their obligations without buying additional ethanol. Regulators are "fundamentally changing the goals of the RFS. They're ignoring the tsunami of credits they're creating," warns Tom Buis, CEO of ethanol trade group Growth Energy.
* Swiss oil-trading giant Vitol SA was one of the big winners during the 2013 spike in RIN prices, despite having no U.S. refineries of its own. The company's Houston-based trading team invested in RINs before the spike, and sold heavily as prices climbed.
* Financial institutions including JP Morgan Chase and Morgan Stanley were similarly active players in the 2013 trading spree. In June, Morgan Stanley was reportedly one of several foreign buyers that scooped up millions of gallons of Brazilian ethanol to cash in on inflated RIN premiums for the country's advanced biofuels.
* Non-diversified ethanol producers such as Green Plains (NASDAQ: GPRE) and Pacific Ethanol (NASDAQ: PEIX) will remain dependent on effective RIN implementation to spur demand for their products, especially as they ramp up production. "We think it's the right time to start to embark on going after some of those extra RIN capacity that we have," Green Plains CEO Todd Becker told investors earlier this year.