Will Changing the Point of Obligation Improve the RFS?

by John Campbell (Biodiesel Magazine/Ocean Park Advisors) The U.S. EPA has set off a debate within the petroleum industry by suggesting that the point of obligation for compliance with the renewable fuel standard (RFS) be moved from the hands of a few petroleum refiners to the hands of many petroleum blenders. This dispute is gaining momentum, going round-and-around like a carrousel.

Small refiners who do not have downstream assets argue that they are being held up by big refiners who have blending and retail assets. Some independent refiners who generate their own renewable identification numbers (RINs) through ownership of biofuel plants have expressed support for moving the point of obligation. Large refiners have said “no.” Due to the vast difference of opinion within the petroleum industry, it is highly unlikely that EPA will make a change. But that does not mean the problem of some refiners being forced to buy high-priced RINs will go away.

Although it might reduce some of the trading hanky-panky going on, moving the point of obligation would not change RIN supply and demand fundamentals. There may be a better way to improve the ride: EPA should reconsider allowing biofuel producers to separate the RIN from the physical gallon.

Trading was envisioned by Congress and regulators but the RIN system was never intended to become an unregulated and unsupervised speculative ride. The view was that nobody would be interested in this archaic piece of digital data and that trading would occur primarily between obligated parties. For many years RIN values were just pennies, mostly reflecting transportation differentials between regions. Today the RIN values are much higher, so the cost of compliance just got a lot pricier.

The RINs allowed for inter-year and year-to-year banking and trading of credits to account for different fuel needs and infrastructure throughout the country. It meant that biofuels could be used where it made the most sense and allowed a marketplace to develop in the buying and selling of RINs.

Unfortunately, as you might see with any new program, a few problems have emerged that have made the RIN market controversial. They are time, transparency and trading.

Assuming the point of obligation stays the same, there are other alternatives that might improve the situation:

1. EPA must make their decisions on time. This will: A) Give the market less time to speculate about what EPA might do, and B) Put the compliance deadlines back on track—less time to trade RINs. ...

2. Increase transparency. Each time a RIN trades, the new owner needs to be identified immediately. ...

3. Limit trading. Other traded agricultural commodities have position limits, daily price movement limits, and the status of the ownership is known (commercials versus noncommercials, for example). While not exactly comparable, RINs trading could be limited to those with a nexus to the industry and the status of ownership (obligated party versus nonobligated party) could be made known immediately. There could be other practical ideas to reduce the speculative aspect of trading.

Rather than changing the point of obligation, EPA should reevaluate allowing biofuel producers to separate the RIN from the physical gallon. Under current rules only the blender can separate the RIN. Decoupling RINs at the point of manufacture would not solve many of the problems listed above, but small refiners could at least deal directly with biofuel producers rather than having to buy from their petroleum competitor or a speculative holder.

We may not be able to stop the merry-go-round of RIN compliance, but we can set it at a better pace, and keep the big kids from jumping the line. READ MORE