Analysis of Renewable Identification Numbers (RINs) in the Renewable Fuel Standard (RFS)

Congressional research reportApr 8, 2014

Ask Donna

What actually matters in this document.

Text

Analysis of Renewable Identification

Numbers (RINs) in the Renewable Fuel

Standard (RFS)

(name redacted)

Section Research Manager

April 8, 2014

Congressional Research Service

7-....

www.crs.gov

R42824

Analysis of RINs in the RFS

Summary

The federal Renewable Fuel Standard (RFS) was established in the Energy Policy Act of 2005

(EPAct) and significantly expanded in the Energy Independence and Security Act of 2007 (EISA).

The RFS requires the use of renewable biofuels in transportation fuel—for 2013, the mandate was

16.55 billion gallons of renewable fuel. Within the larger mandate, there are sub-mandates

(“carve-outs”) for advanced biofuels (e.g., biomass-based diesel and cellulosic fuels). By 2022,

the RFS requires the use of 36 billion gallons of renewable fuels, including 21 billion gallons of

advanced biofuels. For 2014, EPA has proposed lower mandates than those scheduled in EISA.

The RFS is a market-based compliance system in which obligated parties (generally refiners

and/or terminal operators) must submit credits to cover their obligations. These credits—

Renewable Identification Numbers, or RINs—are effectively commodities that can be bought or

sold like other commodities. For each gallon of renewable fuel in the RFS program, one RIN is

generated. Each RIN is a 38-digit number, with blocks of digits corresponding to various data,

including the year the RIN was generated, the producer of the fuel, and the type of fuel. RINs are

valid for use in the year they are generated and the following year.

From the beginning of the RFS program, there have been concerns with RIN generation and the

RIN market. Because of concerns over transposed digits, allegations of double-counting

(intentional or unintentional) and other errors and inaccuracies, when EPA finalized rules for the

RFS as expanded by EISA (the “RFS2”), EPA also established a new transaction system in an

effort to address these concerns. All RIN transactions must be cleared through this system, called

the EPA Moderated Transaction System (EMTS). From the beginning of the RFS2 EPA has

maintained obligated parties must exercise due diligence. Under this “buyer beware” system

those purchasing or receiving RINs must certify their validity on their own, and they are

responsible for any invalid RINs they pass on to other buyers or submit to EPA for compliance.

In late 2011 and early 2012, EPA issued Notices of Violations (NOVs) to three companies that the

agency alleges fraudulently generated a combined 140 million biodiesel RINs in 2010 and 2011.

In late 2013 EPA issued an NOV to a fourth company; in early 2014 two men were indicted for

fraud in a separate case. Because of these RIN fraud cases, EPA is looking at establishing a

system whereby RINs can be certified by third parties registered with EPA. EPA is considering

whether such certification would provide obligated parties with an “affirmative defense” if RINs

are later found to fraudulent—that is, obligated parties would not be liable for penalties under the

Clean Air Act for the use of such RINs. Key questions include whether such an affirmative

defense would also eliminate the requirement to purchase make-up RINs. EPA proposed a plan in

January 2013, but the rule has yet to be finalized.

Most RINs are bought and sold through private contracts. However, there are also spot markets

for RINs, and in 2013, spot prices for conventional ethanol RINs rose dramatically. Prices rose

from roughly $0.07 per gallon in early January to over $1.40 per gallon in mid-July. Through the

second half of 2013, prices dropped even more rapidly, although they rebounded somewhat in

early 2014. Various factors have been identified by stakeholders as potentially causing the price

increase, including whether sufficient amounts of ethanol can be blended into gasoline to meet

the RFS mandates and the extent to which non-obligated parties are speculating in RIN markets.

In the 112th and 113th Congresses several congressional hearings have been held and various bills

have been proposed to address both RIN issues and the overall RFS.

Congressional Research Service

Analysis of RINs in the RFS

Contents

Introduction...................................................................................................................................... 1

Current RFS Requirements .............................................................................................................. 1

The Role of RINs ............................................................................................................................. 3

RINs........................................................................................................................................... 3

EPA Moderated Transaction System (EMTS) ........................................................................... 4

The Market for RINs........................................................................................................................ 5

RIN Prices ................................................................................................................................. 5

Prices Through 2012 ........................................................................................................... 6

Prices Since January 2013 ................................................................................................... 8

RIN Volumes ........................................................................................................................... 10

Fraudulent RINs............................................................................................................................. 12

Effects on Obligated Parties .................................................................................................... 12

Quality Assurance Program ..................................................................................................... 13

Policy Options ......................................................................................................................... 13

Additional Questions ............................................................................................................... 15

What Other Types of RIN Fraud Are Possible? ................................................................ 15

How Likely Is RIN Fraud in the Future? .......................................................................... 16

How Do Various Players Benefit from the Different Policy Options? .............................. 16

Conclusion ..................................................................................................................................... 17

Figures

Figure 1. Nested RFS Mandates for 2013........................................................................................ 2

Figure 2. Simplified Schematic of RIN Trading System ................................................................. 5

Figure 3. Spot Renewable Fuel (Corn Ethanol) RIN Prices, 2011-2012 ......................................... 6

Figure 4. Spot BBD RIN Prices, 2011-2012 .................................................................................... 7

Figure 5. Spot Advanced Biofuel RIN Prices, 2011-2012 ............................................................... 8

Figure 6. Spot Renewable Fuel (Corn Ethanol) RIN Prices ............................................................ 9

Figure 7. Total RINs Registered 2012 ........................................................................................... 11

Figure 8. Total RINs Registered 2013 ........................................................................................... 11

Contacts

Author Contact Information........................................................................................................... 17

Congressional Research Service

Analysis of RINs in the RFS

Introduction

The Energy Policy Act of 2005 (EPAct, P.L. 109-58) established a renewable fuel standard (RFS),

requiring the use of biofuels (such as ethanol) in the nation’s fuel supply. The Energy

Independence and Security Act of 2007 (EISA, P.L. 110-140) significantly expanded this

mandate.1 The RFS mandate has been a major impetus to the development of U.S. biofuels

industries, especially the ethanol and biodiesel industries. In 2005, the United States produced 3.9

billion gallons of ethanol and 0.1 billion gallons of biodiesel. By 2013, production had increased

to roughly 14 billion gallons of ethanol and over 1 billion gallons of biodiesel.

Covered parties meet their obligations under the RFS by surrendering renewable fuel credits to

EPA equal to the number of gallons in their annual obligation. These credits, known as

Renewable Identification Numbers (RINs), are generated when a batch of biofuel is produced,

and separated from the fuel by obligated parties (generally gasoline and diesel fuel refiners or

blenders). Once separated, these RINs may be traded like other commodities. Recent civil and

criminal action against parties accused of registering and selling fraudulent RINs has raised

questions about the integrity of the RIN market and EPA’s oversight of the market. Further, some

stakeholders have argued that recent RIN market volatility indicates that obligated parties are

facing challenges in complying with the mandates.

This report outlines the RFS and the current RIN system, discusses the current market for various

RINs, and outlines policy considerations to address RIN fraud going forward.

Current RFS Requirements

For 2013, the RFS required the blending of 16.55 billion gallons of renewable fuel in

transportation fuels, including at least 1.28 billion gallons of biomass-based diesel substitutes

(BBD). The RFS increases to 36 billion gallons by 2022 with an increasing share coming from

“advanced biofuels”—biofuels produced from feedstocks other than corn starch—including

cellulosic biofuel and BBD fuels. As was the case in previous years, in 2013 the vast majority of

the mandate was met with U.S. corn ethanol (and a smaller amount of biodiesel, as well as

sugarcane ethanol from Brazil).

By 2015 corn ethanol’s share of the RFS is effectively capped at 15 billion gallons per year. The

EISA amendments to the RFS specifically mandate the use of cellulosic biofuel (16 billion

gallons by 2022) and biomass-based diesel fuel (at least 1.0 billion gallons annually by 2012).

However, advanced biofuels, especially cellulosic fuels, have been slow to develop and fuel

production lags the EISA’s mandate schedule.2

Within the overall RFS mandate, there are sub-mandates for specific types of fuel. For example,

for 2013 EISA required the use of 16.55 billion gallons of biofuels, of which 2.75 billion must be

“advanced biofuels.” Within the advanced biofuel carve-out for 2013, at least 1.28 billion gallons

were to be biomass-based diesel (BBD) fuels 6 million gallons were required for cellulosic

For more information on the RFS, see CRS Report R40155, Renewable Fuel Standard (RFS): Overview and Issues,

by (name redacted) and (name redacted).

See CRS Report R41106, Meeting the Renewable Fuel Standard (RFS) Mandate for Cellulosic Biofuels: Questions

and Answers, by (name redacted).

Congressional Research Service

Analysis of RINs in the RFS

biofuels.3 In the early years of the program, the lion’s share of the mandate is unspecified, and the

vast majority of this unspecified portion has been—and is expected to be—supplied by cornbased ethanol largely produced in the Midwest. At the beginning of each year, EPA determines a

percentage standard that all suppliers must meet, which is based on expected total U.S. gasoline

and diesel demand for the prior year. For example, for 2013, the overall biofuel standard was

9.74%, the advanced biofuel standard was 1.62%, the BBD standard was 1.13%, and the

cellulosic biofuel standard was 0.004%.4

Figure 1. Nested RFS Mandates for 2013

(not to scale)

Total Renewable Fuel

(16.55 Bgal)

Advanced Biofuel (2.75 Bgal)

Biomass-Based

Diesel (BBD) (1.28 Bgal)

Cellulosic Biofuel

(6 Mgal)

Source: CRS

Notes: As noted by the arrows, fuel qualifying as one type of biofuel in the RFS qualifies for all levels above it.

For example, cellulosic biofuel may also be used to meet the advanced biofuel mandate and the overall RFS

mandate. However, non-cellulosic advanced biofuel (e.g., sugarcane ethanol) may not be used to meet the

cellulosic or BBD mandates. Likewise, corn starch ethanol may only be used to meet the total RFS mandate (and

not the advanced, cellulosic, or BBD mandates). As noted by the arrows, fuel qualifying as one type of biofuel in

the RFS qualifies for all levels above it. For example, cellulosic biofuel may also be used to meet the advanced

The initial RFS for cellulosic biofuels for 2013 was 1 billion gallons. In August 2013 EPA decreased the mandate to

6.0 million ethanol-equivalent gallons For more information, see CRS Report R41106, Meeting the Renewable Fuel

Standard (RFS) Mandate for Cellulosic Biofuels: Questions and Answers, by (name redacted).

The limitation on corn starch ethanol is roughly 8.1% on gasoline and diesel fuel combined.

Congressional Research Service

Analysis of RINs in the RFS

biofuel mandate and the overall RFS mandate. However, non-cellulosic advanced biofuel (e.g., sugarcane ethanol)

may not be used to meet the cellulosic or BBD mandates. Likewise, corn starch ethanol may only be used to

meet the total RFS mandate (and not the advanced, cellulosic, or BBD mandates).

The sub-mandates for advanced biofuels are nested together (Figure 1). As noted by the arrows in

the figure, fuel qualifying as one type of biofuel in the RFS qualifies for all levels above it. For

example, a gallon of cellulosic biofuel may be used to meet the cellulosic mandate, the advanced

biofuel mandate, and the overall RFS. A gallon of other advanced biofuel (e.g., sugarcane

ethanol) may be used to meet the advanced biofuel mandate and the overall mandate, but may not

be used to meet the cellulosic or BBD mandates. Corn starch ethanol—the most widely used

biofuel in the United States—may only be used to meet the overall RFS.5

The Role of RINs

Compliance with the RFS is measured using RINs. When qualifying biofuels are produced, each

gallon is assigned a RIN. Until the biofuels are sold as fuel or blended into conventional fuels, the

RINs are “attached” to the fuel. Once the biofuel has been blended or sold, the RINs are detached,

and can then be bought and sold like other commodities. At the end of each year, fuel suppliers

must multiply the above percentage standards by their total gasoline and diesel sales to calculate

their renewable volume obligations (RVO), which indicate the total number of each type of RIN

that the suppliers must submit to EPA. To the extent that a supplier has excess RINs, that supplier

may sell them to others who may be short, or save them for use in the following year.

RINs

A RIN is a unique 38-character number that is issued (in accordance with EPA guidelines) by the

biofuel producer or importer at the point of biofuel production or the port of importation.6 Each

qualifying gallon of renewable fuel has its own unique RIN. RINs are generally assigned by

batches of renewable fuel production. (See box below.)

Under the RFS2 RIN formulation, Code D identifies which of the four RFS categories—total,

advanced, cellulosic, or biodiesel—the biofuel satisfies. Together, SSSSSSSS and EEEEEEEE

identify the RIN block which demarcates the number of ethanol-equivalent gallons of renewable

fuel that the batch represents in the context of compliance with the RFS—that is, RIN gallons.

The total number of RINs equals the product of the liquid volume of renewable fuel times its

energy equivalence value (relative to a gallon of ethanol). For example, because biodiesel has an

equivalence value (EV) of 1.5 in the RFS, 1,000 gallons of biodiesel would generate 1,500 RINs.7

Thus, the effective cap on corn-based ethanol was 13.8 billion gallons in 2013, based on the difference between the

overall mandate (16.55 billion gallons) and the advanced biofuel mandate (2.75 billion gallons).

For more discussion on RINs see Robert Wisner, “Renewable Identification Numbers (RINs) and Government

Biofuels Blending Mandates,” AgMRC Renewable Energy Newsletter, Agricultural Marketing Research Center, Iowa

State University, April 2009, available at http://www.agmrc.org/renewable_energy/

agmrc_renewable_energy_newsletter.cfm; or Wyatt Thompson, Seth Meyer, and Pat Westhoff, “Renewable

Identification Numbers are the Tracking Instrument and Bellwether of U.S. Biofuel Mandates,” EuroChoices 8(3),

2009, pp. 43-50.

Unlike the other biofuel categories, the BBD mandate is a requirement on actual gallons. Thus, the 1.28 billion

(actual) gallons required for the 2013 BBD mandate will generate 1.92 RINs.

Congressional Research Service

Analysis of RINs in the RFS

If the RIN block start for that batch was 1 (i.e., SSSSSSSS = 00000001), then the end value

(EEEEEEEE) would be 00001500.

RIN Codes

Any party that owns RINs at any point during

RIN=KYYYYCCCCFFFFFBBBBBRRDSSSSSSSSEEEEEEEE

the year (including domestic and foreign

Where

producers; refiners and blenders; exporters

= code distinguishing RINs still assigned to a

and importers of renewable fuels; and RIN

gallon from RINs already separated

traders) must register with the EPA and follow

YYYY

= the calendar year of production or import

RIN record-keeping and reporting guidelines.

RINs can only be generated if it can be

CCCC = the company ID

established that the feedstock from which the

FFFFF

= the company plant or facility ID

fuel was made meets EISA’s definitions of

BBBBB = the batch number

renewable biomass (including land-use

= the biofuel energy equivalence value

restrictions), and if the fuel meets EISA’s

lifecycle greenhouse gas emission limits. The

= the renewable fuel category

feedstock affirmation and record-keeping

SSSSSSSS = the start number for this batch of biofuel

requirements apply to RINs generated by both

EEEEEEEE= the end number for this batch of biofuel

domestic renewable fuel producers and RINgenerating foreign renewable fuel producers

or importers.

EPA Moderated Transaction System (EMTS)

All RIN transactions, including generation, trade/sale/transfer, separation, and retirement, must be

cleared through the EMTS. When biofuels change ownership (e.g., are sold by a producer to a

blender), any attached RINs are also transferred.8 The Code K status of the RIN is changed at

separation (generally after the fuel is sold from a biofuel producer to an obligated party). (See

Figure 2.)

As noted by EPA in the rule establishing the RFS2 and the EMTS, EPA views the EMTS solely as

a “screening” system, and all due diligence remains the duty of obligated parties.9 Under this

“buyer beware”10 system those purchasing or receiving RINs must certify their validity on their

own, and they are responsible for any fraudulent RINs they pass on to other buyers or submit to

EPA for compliance.

In many cases, the RINs are detached from the actual fuel at the point of initial sale or transfer, and thus RINs may be

detached for fuel that has not yet been blended into motor fuel or sold as motor fuel.

EPA, “Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program; Final Rule,” 75

Federal Register 14732, March 26, 2010.

Ibid., p. 14733.

Congressional Research Service

Analysis of RINs in the RFS

Figure 2. Simplified Schematic of RIN Trading System

Biofuel Producer /

Importer

Attached

RINs

EMTS

Renewable

Fuel

Separated

RINs

Secondary

Market

Retirement

Obligated Parties (Gasoline & Diesel

Refiners, Blenders, Importers)

Retail Sale

Source: CRS, based on Rakesh Radhakrishnan, Market Considerations—RECs and RINs Overlap, Thompson

Reuters, September 25, 2012, p. 8, http://www.renewableenergymarkets.com/docs/presentations/2012/

Radhakrishnan.pdf.

Notes: Black lines indicate RINs attached to actual biofuel gallons. Solid blue lines indicate separated RINs that

may be traded among all market participants. Dashed blue line indicates end-of-year submission of RINs by

obligated parties to EPA to meet RFS mandates. Green lines indicate actual biofuel gallons separated from RINs.

Orange lines indicate that all RIN transactions must be cleared through EMTS.

The Market for RINs

RIN Prices

Because RINs may be bought and sold as commodities, there are RIN spot markets. However,

these spot markets may only provide some insight into the actual value of the total pool of RINs

in a given year, as RINs may or may not be traded after they are detached by fuel suppliers.

Because RINs are not completely fungible, their values may or may not be affected by the

markets for other RINs. For example, RINs for conventional ethanol may only be used for the

overall (unspecified) renewable fuel mandate. However, biodiesel RINs may be used to meet the

BBD, advanced biofuel, and overall RVOs.

It should also be noted that unlike other commodities, RINs generally may only be used in the

year they are generated or for one additional year, although suppliers may only meet up to 20% of

Congressional Research Service

Analysis of RINs in the RFS

their current-year obligation with the previous year’s RINs. Thus, RIN values diminish over time

and ultimately have no value in the second year after they are generated.

Prices Through 2012

Through 2012 there was generally an excess of corn ethanol (beyond what was allowed for

meeting the unspecified portion of the RFS) in the U.S. market, and ethanol RINs generally

traded at much lower prices than other RINs—generally between one and four cents per gallon, as

opposed to a dollar per gallon or more for other fuels. (See Figure 3, Figure 4, and Figure 5.)

Because much of the advanced biofuel mandate is met using BBD RINs, the advanced biofuel

RIN price generally follows the BBD RIN price. For example, when BBD RIN prices spiked in

September 2011 (Figure 4), advanced biofuel RINs showed a similar spike (Figure 5); there was

no spike at that time in corn ethanol RINs (Figure 3). Similarly, BBD and advanced biofuel RIN

prices dropped in the second half of 2012, while ethanol RIN prices increased (but still remained

relatively low) as the 2012 drought raised concerns over U.S. corn production and its effects on

ethanol production.

Figure 3. Spot Renewable Fuel (Corn Ethanol) RIN Prices, 2011-2012

$0.10

$0.09

$0.08

$0.07

$0.06

$0.05

$0.04

$0.03

$0.02

$0.01

$0.00

January-11

May-11

August-11 December-11

April-12

August-12 December-12

Source: “Ethanol and Gasoline Component Spot Market Prices,” OPIS Ethanol & Biodiesel Information Service,

various editions (January 10, 2011-January 7, 2013).

Notes: Average of daily high and low prices reported by OPIS. Most biofuels are sold under contract, and thus

spot prices may not reflect the value of all RINs traded at any given time.

Congressional Research Service

Analysis of RINs in the RFS

Figure 4. Spot BBD RIN Prices, 2011-2012

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00

January-11

May-11

August-11 December-11

April-12

August-12 December-12

Source: “Ethanol and Gasoline Component Spot Market Prices,” OPIS Ethanol & Biodiesel Information Service,

various editions (January 10, 2011-January 7, 2013).

Notes: Average of daily high and low prices reported by OPIS. Most biofuels are sold under contract, and thus

spot prices may not reflect the value of all RINs traded at any given time.

Congressional Research Service

Analysis of RINs in the RFS

Figure 5. Spot Advanced Biofuel RIN Prices, 2011-2012

$1.40

$1.20

$1.00

$0.80

$0.60

$0.40

$0.20

$0.00

January-11

May-11

August-11

December-11

April-12

August-12

December-12

Source: “Ethanol and Gasoline Component Spot Market Prices,” OPIS Ethanol & Biodiesel Information Service,

various editions (January 10, 2011-January 7, 2013).

Notes: Average of daily high and low prices reported by OPIS. Most biofuels are sold under contract, and thus

spot prices may not reflect the value of all RINs traded at any given time.

Prices Since January 2013

Spot prices for conventional (corn-based) ethanol RINs rose dramatically at the start of 2013. On

January 1, ethanol RINs were trading at roughly $0.07 per gallon, but they spiked to over $1.40 in

mid-July, before dropping dramatically in the second half of 2013 (Figure 6). Prices rebounded

somewhat in early 2014. Several factors have been identified by stakeholders as potential causes

for the run-up in prices. For example, many stakeholders are concerned that the fuel supply is

rapidly approaching a “blend wall.”11 There are various factors that limit ethanol content in

gasoline to a maximum of 10%. With a limited number of gasoline gallons sold each year, but an

increasing RFS mandate, the amount of ethanol needed to meet the mandate may exceed the

potential for gasoline blending. To address the blend wall and still meet the RFS mandates,

obligated parties will need to do one of the following: (1) blend ethanol in gasoline at higher

concentrations (e.g., 15%); (2) sell ethanol as an alternative fuel for flexible fuel vehicles (FFVs);

Ryan Tracy, “U.S. Ethanol Mandate Puts Squeeze on Oil Refiners,” The Wall Street Journal, March 10, 2013. For

more information on the blend wall, see CRS Report R40445, Intermediate-Level Blends of Ethanol in Gasoline, and

the Ethanol “Blend Wall”, by (name redacted).

Congressional Research Service

Analysis of RINs in the RFS

or (3) supply non-ethanol biofuels. If none of these options are undertaken in sufficient quantity,

there may be insufficient RINs for obligated parties to meet their RVOs. The rise in spot prices

for corn ethanol RINs in 2013 may reflect a scarcity in RINs not seen in previous years. A second

concern some stakeholders have raised is that non-fuel traders may have been speculating in RIN

markets and pushing up prices.12

Figure 6. Spot Renewable Fuel (Corn Ethanol) RIN Prices

(January 2013 to March 2014)

$1.60

$1.40

$1.20

$1.00

$0.80

$0.60

$0.40

$0.20

$0.00

Source: “Ethanol and Gasoline Component Spot Market Prices,” OPIS Ethanol & Biodiesel Information Service,

various editions (January 7, 2013-March 31, 2014).

Notes: Average of daily high and low prices reported by OPIS. Most biofuels are sold under contract, and thus

spot prices may not reflect the value of all RINs traded at any given time.

Renewable Fuels Association, What Role Did Speculation Play in the March 2013 RIN Price Spike?, 2013.

Congressional Research Service

Analysis of RINs in the RFS

RIN Volumes

The market for RINs is potentially very large, although the amount of RIN trading that occurs is

unclear. Although EPA reports total RINs registered by month, and the EMTS tracks trades and

RIN prices, EPA does not report these data. Likewise, publicly available data from other sources

are similarly limited.13 Figure 7 and Figure 8 show total RINs registered for 2012 and 2013. As

noted above, by volume the RFS is dominated by ethanol produced from corn starch.

For example, OPIS reports daily RIN spot prices for four types of RINs, but does not report trading volume.

Congressional Research Service

Figure 7.Total RINs Registered 2012

Figure 8.Total RINs Registered 2013

Advanced

Biofuel, 0.6

Billion

Advanced

Biofuel, 0.6

Billion

2012

BiomassBased Diesel,

1.7 Billion

Renewable

Fuel (Corn

Ethanol),

13.0

2013

BiomassBased Diesel,

2.7 Billion

Renewable

Fuel (Corn

Ethanol),

13.3 Billion

Source: EPA, EPA Moderated Transaction System (EMTS).

Notes: Roughly 20,000 cellulosic biofuel RINs were also generated in 2012.

Notes: Roughly 423,000 cellulosic biofuel RINs were also generated in 2012.

CRS-11

Analysis of RINs in the RFS

Fraudulent RINs

As noted above, in late 2011 and early 2012, EPA issued Notices of Violations (NOVs) to three

companies (Clean Green Fuels, LLC, Absolute Fuels, LLC, and Green Diesel, LLC) that the

agency alleges fraudulently generated a combined 140 million biodiesel RINs in 2010 and 2011.14

Subsequently, individuals representing two of these companies have also faced criminal

prosecution.15 In December 2013 EPA issued another NOV to Imperial Petroleum, Inc. (and its

subsidiary, e-Biofuels, LLC), and in January 2014 two men were indicted for RIN-related

violations. Because these investigations involve potentially criminal actions, EPA has limited the

amount of information available to traders and obligated parties who may have purchased

fraudulent RINs. Thus, it is unclear whether any other NOVs will be issued in the future.

The 140 million fraudulent RINs from the first three NOVs represent roughly 11% of the

biodiesel RINs generated between mid-2010 and the end of 2011, but less than 1% of the total

RINs generated—as noted above, ethanol produced from corn starch currently dominates the

RFS. However, biodiesel RINs traded at considerably higher prices than ethanol RINs at that

time.

Effects on Obligated Parties

In the regulations establishing the RFS2 and the EMTS, EPA specifically stated that “invalid

RINs cannot be used to achieve compliance with the Renewable Volume Obligations (RVO) of an

obligated party or exporter, regardless of the party’s good faith belief that the RINs were valid at

the time they were acquired.”16 Because of the “buyer beware” nature of the system, obligated

parties who purchased the fraudulent RINs must pay fines for each RIN submitted (EPA and the

companies have generally settled at about $0.10 per RIN), and must submit valid RINs to offset

the fraudulent RINs. Thus, the combined economic costs to the obligated parties may include:

1. the original cost of the fraudulent RINs (spot prices ranged between $0.70 and

$2.00 per RIN over that time);

2. penalties to EPA for Clean Air Act violations ($0.10 per RIN, capped at $350,000

per party);

3. the cost of all make-up RINs (trading at the time of settlement at roughly $0.50

per gallon); and

4. any legal costs in pursuing restitution from fraudulent actors.

NOVs available at EPA, Civil Enforcement of the Renewable Fuel Standard Program, http://www2.epa.gov/

enforcement/civil-enforcement-renewable-fuel-standard-program.

On June 25, 2012, Rodney R. Hailey of Clean Green Fuels, LLC was found guilty of 8 counts of wire fraud, 32

counts of money laundering, and 2 counts of violating the Clean Air Act. On March 29, 2013, Jeffrey David

Gunselman of Absolute Fuels, LLC pled guilty to 51 counts of wire fraud, 24 counts of money laundering and 4 counts

of violating the Clean Air Act.

40 C.F.R. §80.1431(b)(2).

Congressional Research Service

Analysis of RINs in the RFS

Quality Assurance Program

Because of these RIN fraud cases, EPA is looking at establishing a quality assurance program

whereby RINs can be certified by third parties registered with EPA. EPA intends that such

certification would provide obligated parties with an “affirmative defense” if RINs are later found

to be fraudulent—that is, obligated parties would not be liable for civil penalties under the Clean

Air Act for the use of such RINs. As noted by Gina McCarthy, former EPA Assistant

Administrator for Air and Radiation (now EPA Administrator), “the affirmative defense would

ensure that refiners and other program participants who meet the conditions of the affirmative

defense will not face civil penalties.”17

A key component of a Quality Assurance Program would be the establishment of a quality

assurance plan (QAP). The QAP would serve as the basis for audits by third party verifiers

certified by EPA. EPA issued a proposed rule to create a QAP in January 2013 although that rule

had not been finalized as of the end of March 2014.18

Key questions include whether such an affirmative defense would also eliminate the requirement

to purchase make-up RINs. While refiners and others would prefer to not “pay twice” for RINs,

in general biofuel producers argue that not making up the RINs would undermine the legitimate

RIN market. Simply put, if obligated parties are not required to replace invalid RINs with valid

RINs, the size of the legitimate renewable fuel market is reduced. In EPA’s proposed rule, nearly

all invalid RINs would be required to be replaced by either the generator of the invalid RIN, the

third party verifier, or the obligated party.

Policy Options

There are various policy options to address the issues of RIN fraud. EPA could undertake some of

these options under existing Clean Air Act authority, while others would require congressional

action. In general terms, there are at least four options:

1. Do nothing, and let market participants determine the credibility of actors they

trade with;

2. Establish a Quality Assurance Program or some other certification to provide

greater credibility, but do not tie it to EPA’s determination on RIN validity;

3. Establish a certification procedure with an affirmative defense such that

purchasers of invalid RINs are not liable for civil penalties (EPA’s proposal); and

4. Establish a system where all certified RINs are valid for RFS compliance

regardless of subsequent determination that they are fraudulent or otherwise

deficient.

Currently, RIN market participants are acting under the first and second options. They are

independently determining whether to trust the validity of the RINs they purchase. In many cases,

Letter from Gina McCarthy, Assistant Administrator for Air and Radiation, EPA, to The Honorable Gene Green,

Ranking Member, Ranking Member Subcommittee on Energy and Economy, Committee on Energy and Commerce,

August 14, 2012.

EPA, “RFS Renewable Identification Number (RIN) Quality Assurance Program; Proposed Rule,” 78 Federal

Congressional Research Service

Analysis of RINs in the RFS

after the RIN fraud came to light, obligated parties decided to purchase biodiesel and biodiesel

RINs only from the largest producers.19 At the same time, small producers have complained that

they are unable to afford the verification procedures that some obligated parties now require.

Others have argued that the RIN fraud prosecutions have improved the integrity of the market.

For example, one witness to a House Energy and Commerce Committee hearing on RIN fraud

stated “[i]n essence, the Wild West of buying and selling RINs from market participants you don’t

know has ended, the wrongdoers are being rooted out, and everyone now knows that deals that

are too good to be true are in fact too good to be true.”20 However, since that time, at least two

new cases (one civil, one criminal) of RIN fraud have come to light—in both cases the fraud

began in either 2009 or 2010.

Because of substantial remaining uncertainty about the integrity of the market, the National

Biodiesel Board (NBB) and others are working to establish a more formal process for RIN

certification. With the NBB, biodiesel producers have established a RIN Integrity Network where

obligated parties can subscribe to a service where they can receive information on participating

biodiesel producers.21 This and similar efforts are in their early stages, and it is unclear how much

credence RIN purchasers will give these networks. Further, it is unclear whether they will become

the industry standard.

EPA is currently pursuing the third option, where a Quality Assurance Program is established with

third parties auditing RIN generators. EPA has proposed an affirmative defense such that users of

certified RINs would not be subject to civil penalties under the Clean Air Act. In most cases,

under the proposal, the original RIN generator, the third party verifier, or the obligated party

would be required to purchase additional RINs to make up for any certified RINs later found to

be fraudulent. Obligated parties generally would prefer not to “pay twice” for RINs, adding to

their compliance costs. However, eliminating this requirement would effectively shrink the

market for biofuels under the RFS, harming legitimate biofuel producers. As EISA establishes

specific fuel volume requirements, it is unclear whether EPA has the authority under existing

statute to waive that requirement.

In addition to agency action, at least one bill was introduced in the 112th Congress to amend the

RIN system. H.R. 6444 would have required EPA to establish a RIN certification system by

January 1, 2013. The bill would have precluded the agency from later invalidating any certified

RINs. Thus, under the bill, any RIN found subsequently to be fraudulent would have still counted

toward an obligated party’s compliance, without penalties. As noted above, refiners and other

obligated parties would have likely preferred this to other policy options, while biofuel producers

were unlikely to support such blanket protection. No similar bills have been introduced in the

113th Congress, although several bills have been introduced to modify or eliminate the RFS.

Testimony of various biofuel companies before the House Committee on Energy and Commerce Hearing on “RIN

Fraud: EPA’s Efforts to Ensure Market Integrity in the Renewable Fuels Program.” July 11, 2012.

Joe Jobe, Chief Executive Officer, National Biodiesel Board, Testimony Before the United States House of

Representatives Committee on Energy and Commerce Hearing “RIN Fraud: EPA’s Efforts to Ensure Market Integrity

in the Renewable Fuels Program,” Washington, DC, July 11, 2012.

Genscape, Genscape’s RIN Integrity Network, http://info.genscape.com/RIN.

Congressional Research Service

Analysis of RINs in the RFS

Additional Questions

The concerns raised above, and proposed policy remedies, raise additional questions about the

potential for RIN fraud in the future, as well as the effects on stakeholders from any policy

solution. These questions include:

1. Beyond the instances of fraud currently being prosecuted, what other instances

are unreported, and what other types of fraud are possible in the future?

2. How likely is fraud in the future, and what are the implications? and

3. How do various players benefit from the different policy options?

What Other Types of RIN Fraud Are Possible?

In the first three cases of RIN fraud currently reported by EPA, fraudulent RINs were generated

for fuel that did not exist. However, other potential errors or opportunities for fraud include:

1. double counting, where the same RIN (representing a gallon of actual fuel) is

transferred to two different entities;

2. improper split, where a batch of RINs is separated into two or more groups and

sold to different entities, but the total number of RINs somehow changes (an

example of double counting);

3. improper reporting of RIN data (type of fuel, size of batch, etc.);

4. failure to report export (for every gallon of fuel exported any RINs from that

export must be retired, as the fuel was never used as transportation fuel in the

United States)—EPA alleges this happened under the January 2014 criminal

indictment.

The EMTS was established in part to address errors of the first three types. However, it is unclear

whether the EMTS completely screens out these errors. Especially as regulations require all

transactions be reported within five business days, the real-time reporting requirements may

potentially lead to errors if entities feel rushed in completing reports and transactions on time. On

the other hand, real-time reporting may make it easier to catch errors and irregularities than under

the previous system, where most data verification was completed on a quarterly basis.

The latter issue, that fuel has been exported without retirement of necessary RINs, has been raised

by some stakeholders.22 RFS regulations are explicit that when renewable fuel is exported that the

exporter must have RINs to offset that volume: “Any party that owns any amount of renewable

fuel, whether in its neat form or blended with gasoline or diesel, that is exported from any of the

regions described in § 80.1426(b) shall acquire sufficient RINs to comply with all applicable

Renewable Volume Obligations under paragraphs (b) through (e) of this section representing the

exported renewable fuel.”23

For example, see Jon P Fjeld-Hansen, Managing Director, Musket Corporation, Testimony Before the United States

House of Representatives Committee on Energy and Commerce Hearing “RIN Fraud: EPA’s Efforts to Ensure Market

Integrity in the Renewable Fuels Program,” Washington, DC, July 11, 2012.

40 C.F.R. §1430(a).

Congressional Research Service

Analysis of RINs in the RFS

It is unclear to what extent, or whether, parties have been exporting fuel without securing the

necessary RINs. As noted above, in January 2014 two men were indicted for allegedly operating

such a scheme. To the extent that this sort of fraud is occurring, as with other types of fraud, it

would lead to lower domestic renewable fuel use than required under the act. That would likely

lead to an oversupply of RINs and a lower RIN price received by all market participants.

However, unlike other types of fraud, actual fuel would be produced, so the overall level of U.S.

biofuel production may not decline.

How Likely Is RIN Fraud in the Future?

To date, all of the reported cases of fraud have occurred in the biodiesel market. There are several

reasons that have been given for this: (1) over most of the RFS2 the market price for BBD RINs

had been much higher than that for ethanol RINs, making any transaction (legal or illegal) that

much more valuable; (2) in general biodiesel producers are smaller operations than ethanol

producers, and the companies involved may be less well known to market participants; and (3)

limited verification procedures existed at the time.

Between actions taken by industry, proposed regulations from EPA, and potential congressional

action, the latter two reasons for fraud in the biodiesel RIN market may be fully addressed.

However, the first cause—a high price for some RINs—may continue in the future. By 2022, the

RFS requires the use of 36 billion gallons of renewable fuels, more than double the amount

required in 2012. Thus, the absolute volume of the market will be larger in the future. Further, of

the 36 billion gallons required in 2022, 16 billion gallons are required to come from cellulosic

biofuels. Currently, there is very limited production of these fuels, and their production costs are

high. To the extent that cellulosic fuel costs remain high in the future, the aggregate value of the

cellulosic RIN market could be significantly higher than the total RIN market today. The higher

value of this market might be a draw to actors looking to circumvent the law.

How Do Various Players Benefit from the Different Policy Options?

As noted above, obligated parties would like any new certification system to include an

affirmative defense against civil penalties if they act in good faith. The details of that affirmative

defense will determine who might benefit from policy changes. For example, in general obligated

parties are more likely to benefit from a blanket exemption from both civil penalties and the

requirement to purchase RINs to make up for ones later found to be invalid.24 In general, biofuel

producers are more likely to benefit from a policy that still requires obligated parties to purchase

make-up RINs. Otherwise, the market for RINs—and thus the fuel they represent—would

effectively shrink by the amount of any fraudulent RINs.

Any third-party certification procedures will add to the cost of producing biofuels and RINs.

Various actors may be more or less able to absorb those costs. For example, obligated parties may

be able to pass the additional cost along to gasoline and diesel fuel consumers through higher

pump prices. Further, larger biofuel producers may be able to take advantage of economies of

scale and spread the cost across all gallons of fuel they produce. Smaller producers, however,

H.R. 6444 (112th Congress) would have addressed this by removing EPA’s authority to invalidate (for any reason) a

certified RIN later found to be deficient. Thus, even a deficient RIN could be traded or used to meet a party’s RVO as

long as it had been certified by the agency.

Congressional Research Service

Analysis of RINs in the RFS

may be less able to spread the cost over the fewer gallons they produce and thus their per-gallon

production costs may increase relative to their larger competitors. As noted above, many biodiesel

producers are smaller operations who may feel more of these effects than ethanol producers (who

generally produce larger volumes of fuel). In the future, cellulosic biofuel producers may also

face similar pressures as these facilities are expected to be on the smaller side.

Conclusion

The establishment of the Renewable Fuel Standard has created a market for RINs that has grown

both in volume and in value over time and is expected to continue to grow over the next decade.

However, cases of fraud in the early years of the biodiesel RIN market raise questions about the

integrity of RIN markets, as well as EPA’s oversight of the markets. A dramatic increase in corn

ethanol RINs in 2013 has raised additional questions about the RIN system and the overall RFS.

Various policies have been proposed to address these concerns, and the details of those policies

will affect RIN markets as well as the relative benefits to different market players.

Author Contact Information

(name redacted)

Section Research Manager

[redacted]@crs.loc.gov, 7-....

Congressional Research Service

EveryCRSReport.com

The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the

Library of Congress, charged with providing the United States Congress non-partisan advice on

issues that may come before Congress.

EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The

reports are not classified, and Members of Congress routinely make individual reports available to

the public.

Prior to our republication, we redacted names, phone numbers and email addresses of analysts

who produced the reports. We also added this page to the report. We have not intentionally made

any other changes to any report published on EveryCRSReport.com.

CRS reports, as a work of the United States government, are not subject to copyright protection in

the United States. Any CRS report may be reproduced and distributed in its entirety without

permission from CRS. However, as a CRS report may include copyrighted images or material from a

third party, you may need to obtain permission of the copyright holder if you wish to copy or

otherwise use copyrighted material.

Information in a CRS report should not be relied upon for purposes other than public

understanding of information that has been provided by CRS to members of Congress in

connection with CRS' institutional role.

EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.