Regulation of Fuels and Fuel Additives: Renewable Fuel Standard ...

Under most other credit trading programs, parties obligated to meet a standard are
also the parties that generate credits for trade. Under these systems, non-obligated parties
can participate only to the degree that obligated parties explicitly include them. In the
case of the RFS program, however, the production of renewable fuels and their
conversion into motor vehicle fuel through blending is largely done by persons other than
obligated parties. To the degree that our proposed program allowed the disparity between
RFS obligations and the means of compliance to continue, stakeholders have expressed
concerns about a variety of problems that could arise, such as market power by RIN
sellers in the market where RINs are exchanged. Market power on the part of nonobligated
parties could result in higher prices for RINs than prices that would arise in a
competitive, well-functioning market setting. For instance, if a renewable fuel producer
or marketer could separate the batch-RIN from the batch, he could in theory withhold the
RIN from the marketplace temporarily. By the end of an annual compliance period, a
scarcity of RINs could increase their price, at which point the renewable fuel producers
or marketers could begin to sell the RINs at an inflated price. In the extreme such parties
could potentially withhold a large number of RINs from the market, creating a scarcity of
RINs that could compel obligated parties to purchase additional volumes of renewable
fuel with associated RINs. These scenarios are of particular concern given that we expect
there will be a relatively small number of renewable fuel producers and marketers selling
RINs in the marketplace. For instance, although there currently exist about 100 ethanol
production facilities in the U.S., nearly half of the production volumes come from only
seven companies. Likewise, only five companies manage the majority of ethanol
marketing.
We believe that the general prohibition against the separation of RINs from
batches in the distribution system will place only a small additional burden on marketers
and distributors of renewable fuel. According to several stakeholders, a large amount of
ethanol is already purchased from renewable fuel producers directly by refiners. In these
cases, the RIN would be transferred directly from the renewable fuel producer to an
obligated party. For the remaining batches of ethanol that do experience multiple
transfers before being blended into gasoline, the RIN itself would represent a small
incremental item of information that must be recorded and transferred along with batches
and could be included in normal business records.
In addition to the recordkeeping responsibilities described in more detail in
Section IV, parties that would be required to transfer RINs with batches under our
proposed program would also have the primary responsibility of maintaining the integrity
of RIN-batch pairing when batches are split or merged. Our proposed approach to these
situations is described below.
i. Batch splits
As described in Section III.D.2, batch-RINs assigned to batches of renewable fuel
would be formatted such that the volume block codes (SSSSSS and EEEEEE) would
identify every gallon in a batch, and thus every gallon-RIN. Thus in most cases there will
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