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RFS Adjustments Justified According to Key Indicator -- Economist

Friday's announcement of the paring-down of the ethanol mandate and increase in biodiesel usage through 2016 and 2017, respectively, is rooted in the market demand for both fuels in the broader context of the fuels sector in general, according to one key variable.

Renewable Identification Numbers (RINs) are a measure used by the U.S. Environmental Protection Agency (EPA) to track renewable fuels and comprises the basis for RFS mandate compliance. Though it's something of a complicated formulaic number, a RIN is essentially tied to a physical amount of renewable fuel, either ethanol or biodiesel.

"The EPA created the RIN system to track RFS compliance of obligated parties. A RIN is a 38-character number assigned to each physical gallon of renewable fuel produced or imported. Obligated parties that produce or own RINs must register with EPA and comply with RIN record and reporting guidelines on a quarterly basis. RIN generation and transaction data is available from the EPA Moderated Transaction System (EMTS)," according to EPA. "The RIN is attached to the physical gallon of renewable fuel as it is transferred to a fuel blender. After blending, RINs are separated from the blended gallon and are used by obligated parties (blenders, refiners, or importers) as proof that they have sold renewable fuels to meet their RFS mandated volumes. RINs may be used to satisfy volume requirements."

Ahead of Friday's announcement on the reshuffling of RFS mandates for the 2 fuels, University of Illinois Extension ag economist Scott Irwin says RIN numbers essentially foreshadowed the adjustments.

"The RINs market has an exceptional track record in recent years of predicting EPA policy changes. Hence, the structure of current RINs prices is analyzed for clues regarding what the new EPA proposal might contain," Irwin said in a report released Thursday. "In recent weeks, 2014 and 2015 RINs prices have remained high in absolute terms. This structure suggests three important conclusions: i) the RINs market is expecting relatively large biodiesel mandates for 2014-2016; ii) the RINs market does not expect the ethanol mandates in 2014-2016 to be set at the E10 blend wall (as in the first preliminary proposal of November 2013); and iii) the RINs market does not expect the ethanol mandate to immediately return to statutory levels."

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