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Tracking and Trading the Renewable Identification Number
by Clayton McMartin

Interest in ethanol as an answer to environmental concerns and America’s increasing dependence on foreign oil has increased exponentially in recent years. This is most evident by legislative action culminating into today’s Renewable Fuel Standard (RFS), where billions of gallons of ethanol and other biofuels are now being utilized for motor fuel across the United States.

The nation’s progressive RFS is the result of industry, Congress, and the Environmental Protection Agency working together to implement homeland policy for the long-term benefit of the American public.

Nearly a year has passed since the program went into effect, September 1, 2007, and many companies and their management have yet to develop a complete understanding of the real mechanics of the RFS. Just what does make it work? What makes it tick?

Tracking the journey of renewable fuel

We are all aware that billions of gallons of renewable fuel are now being blended into our finished gasoline and diesel fuels, but few understand what is at the heart of the RFS program. Believe it or not, every gallon of renewable fuel in the U.S. has a unique serial number assigned to it. This unique 38-digit serial number , known as the Renewable Identification Number or RIN, is what makes the program work and allows EPA to monitor progress and make certain that all parties are playing by the rules.

The finalization of the Renewable Fuel Standard by the U.S. EPA, as published in the Federal Register on April 10, 2007, prompted the need for all parties in the renewable fuel supply chain to keep detailed records for tracking and reporting of their activities to the Agency. In addition to daily transfer documents, much like warranty deeds for real property, there also exists requirements for full reporting of every transfer to EPA each quarter as well as annually.

This article will reveal how the RFS works on a day-to-day basis, including how operating companies throughout the supply chain have modified their businesses to accommodate this new program and how RINs serve as the free-market mechanism for the cost-effective implementation of the RFS.

A new product in the supply chain

Under the RFS, the process of transferring renewable fuel requires the use of a complex identification process for each gallon of fuel produced or imported into the United States. The process is centered on a 38-digit code, termed the Renewable Identification Number (RIN). As ethanol is produced or imported, the producer or importer has the responsibility to assign this series of numbers to their product. Assignment is made according to guidelines established by EPA and found within the RFS regulations. Note that EPA does not assign the actual RIN number, nor does it maintain a registry for these numbers.

Once the RIN number is assigned to the fuel, it essentially becomes the renewable fuel credit. As product is then sold to the customer, it is now accompanied by the RIN. This transfer of physical fuel and the paper RIN credit requires proper transfer documentation be generated and transmitted as title is transferred to the product. Subsequently, each future transfer of renewable fuel accompanied by the RIN requires that each party in the chain generate the appropriate product transfer documents (PTDs). The PTDs serve as the basis for the recordkeeping and reporting requirements under the regulations.

The program applies to any party taking title to the product, anywhere along the supply chain, from the point of production until the renewable is ultimately blended into finished gasoline or diesel. The list of affected parties includes ethanol and biofuel producers, importers, petroleum refiners, marketers, traders, exporters, and blenders. With literally thousands of possible combinations, the process is prone to errors – errors that can mean non-compliance and stiff penalties for the unintended violator.

RFS prompts new paperwork and reporting

At every link in the renewable supply chain where title changes hands lays the responsibility to track, account, and report on activity. EPA developed a methodology for compliance which relies upon producers to assign the appropriate Renewable Identification Number to each batch. The rule requires that each and every subsequent transfer of the smaller sub-batches also have the appropriate assignment of RINs, a number that changes every time the batch of fuel is split into two smaller volumes and transferred. The possible combinations of producers, marketers, traders, brokers, blenders, importers, exporters, and refiners are nearly endless, bringing considerable complexity to the day-to-day operations of the renewable fuel supplier.

A day in the life of a RIN

Consider this simplified example of the chain of supply where a producer sells to a marketer, who in turn sells to a blender.

Step 1

A batch of 20,000 gallons of ethanol is produced and the appropriate 38-digit RIN is assigned to the volume of fuel. In this case the RIN might look something like this:

12008650270076000011020000000100020000

Step 2

The ethanol customer picks up a load of 8004 gallons and receives 8004 Gal-RINs with it. The RIN for the load would look like this:

12008650270076000011020000000100008004

Since the entire 20,000 gallon volume was not transferred, the producer would keep the balance of 11,996 gallons of fuel and the corresponding 11,996 Gal-RINs for the next sale in the series. The remaining sub-batch RIN would look like this (note the last 16 digits):

12008650270076000011020000800500020000

Step 3

The ethanol is now transferred from the marketer to the blender, and again RINs would be transferred with the ethanol. Let’s say that the blender only picks up enough ethanol for a splash blend – 792 gallons. Here is what the RIN looks like now:

12008650270076000011020000000100000792

And the balance of the RIN would look like this:

12008650270076000011020000079300008004

Step 4

The blender now blends the ethanol into gasoline and the RIN becomes “separated” form the fuel, making it a tradable credit. We will discuss more about RINs as renewable fuel credits in the Part 2 of this series, featuring in next month’s edition.

Government paperwork is required at every step in this example in order to comply with the regulations. In the cases where title is transferred from one party to the next, steps 2 and 3 in our example, product transfer documents are required. In all cases additional internal records are to be generated and maintained for audit purposes. Keep in mind, this is a very simplistic example and in reality the chain of title to ethanol and the accompanying RIN can include 3, 7, or even more links.

More responsibilities, expenses, fines

With the advent of the RFS program came the need for companies to dedicate resources to this new RIN management function. Many companies have modified existing accounting systems in order to generate the necessary transfer documentation and provide for the recordkeeping requirements under the regulations. Experience has now shown that the challenge with managing RINs resides in the fact that RINs are serial numbers. As you can see in the example above, RINs are not only serial numbers but serial numbers that are subdivided throughout their life.

One of the biggest challenges that industry has faced is just how difficult it is to manage the RIN serial number with conventional accounting practices. Recently EPA issued a guidance document that addressed many of the accounting issues and timeliness of transfer documents. The guidance document “Improper and Illegal RIN Trading Practices” has been viewed by many within industry as a warning from EPA, with the likelihood of fines to follow. You can find the document at http://www.epa.gov/otaq/renewablefuels/impropertrading.htm

Since the RFS falls under the authority of the Clean Air Acts, fines can be assessed at ,500 per day plus any economic benefit derived from the violation. Everyone in the ethanol industry needs to have a good understanding of this program. A series of free educational briefings is available, as described at the end of this article.

Part two of this series, to be featured in next month’s issue of Ethanol Today, will discuss alternate methods of managing RINs, trading RINs as renewable fuel credits, and how companies are safeguarding against invalid RINs and fraudulent acts.

 
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The American Coalition for Ethanol publishes Ethanol Today magazine each month to cover the biofuels industryís hot topics, including cellulosic ethanol, E85, corn ethanol, food versus fuel, ethanolís carbon footprint, E10, E15, and mid-range ethanol blends.
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