Earlier this month, the White House directed the US Environmental Protection Agency (EPA) to draft and propose rules that would reform and restrict the trading of renewable identification numbers (RINs) under the federal Renewable Fuel Standard (RFS). Despite the potential to significantly impact the multi-billion-dollar RIN trading market, this news did not receive significant press coverage because it was included as part of another announcement that EPA would seek to permit year-round sales of gasoline blends containing up to 15% ethanol (E15).

Regardless of opinions on whether RIN markets are currently functioning properly and need reforms, it is very likely that the contemplated reforms would disrupt trading activities of most entities active in the RIN markets and certainly would impose new compliance obligations on those entities. As a result, it is recommended that any current holders of RINs plan in advance for this rulemaking and actively participate in the rulemaking process.
 
Possible Reforms

While the White House did not provide significant details in its statement directing the EPA to implement RIN trading restrictions, the Administration did specify that EPA should consider and develop reforms that would:

1. Prohibit entities other than refiners and importers of gasoline and diesel (known as “Obligated Parties” under the RFS) from purchasing separated RINs;
2. Require public disclosure when RIN holdings held by an individual actor exceed specified limits;
3. Limit the length of time entities other than Obligated Parties may own RINs; and
4. Require that the retirement of RINs for the purpose of compliance be made in real time.

Unintended Consequences of the Reforms
 
Based on these directives, it appears that non-obligated parties, such as renewable fuel producers and RIN traders, could continue to purchase assigned RINs (i.e., K1 RINs that must be transferred with renewable fuel), but such parties would be limited in the amount of time they could hold RINs. The restriction on the time a party could own a RIN would likely push RIN traders out of the market altogether because they would find it difficult to take long-term positions at storage terminals or railcar leases for their renewable fuel given their need to transfer the RINs with the renewable fuel within a short period of time. These restrictions could also significantly impact renewable fuel producers because they would be prohibited from owning separated RINs and would need to sell any RINs they separate within a certain period of time following generation. The purpose of the restriction on the length of time a party can own a RIN is unclear given that RINs only have a two-year shelf life and that an Obligated Party can only use 20% of previous year RINs to meet annual obligations. As a result, it is very difficult to predict what time limit EPA will impose on owning RINs.
 
The reforms will present challenges for importers of gasoline and diesel and component blenders of gasoline (i.e., those that purchase gasoline blendstocks and combine them to create finished gasoline). These parties are Obligated Parties, but only conduct their activities on the margin when the right arbitrage opportunities present themselves. These parties may not import a cargo of gasoline or diesel until partway through the year or not until the end of the year. They technically do not become an Obligated Party until they conduct their import or blending activity—raising the question of whether they could purchase separated RINs prior to their import or blend activity under the possible reforms. Even if EPA allows such parties to purchase separated RINs prior to becoming an Obligated Party in a compliance year, these parties could find themselves out of compliance if they ultimately do not import or blend in a given year due to business reasons and have nevertheless owned RINs.
 
It also seems that any limit EPA sets on RIN ownership over which RIN holdings would be subject to public disclosure would be arbitrary given the way in which the RIN markets operate. Obligated Parties incur a RIN retirement obligation on every gallon of gasoline and diesel they import or produce, and gasoline and diesel production varies throughout the year. However, renewable fuel production does not correspond to gasoline and diesel production, such that an individual Obligated Party may need to purchase a significant number of RINs at the beginning of the year to cover its anticipated RIN retirement obligation at the end of the year—or vice versa. As a result, a party could own many more times the number of RINs than the number of gallons of gasoline they produced in a given month without any intention other than to purchase RINs for their own compliance use.

Public disclosure of that entity’s RIN holdings could be used by competitors or interest groups to argue that the entity is manipulating the market in some manner; it would be disruptive and expensive to have to prove the negative. Note, of course, that trading of RINs is currently allowed by any registered entity, and such trading is vital in helping parties manage their costs and exposure to the variety of commodity prices that impact the RIN market; it is very unlikely that minimizing or discouraging trading will be a positive for RFS stakeholders.
 
Lastly, it is unclear what the White House intended in its direction to require RIN retirement “in real time.” Obligated Parties incur a RIN retirement obligation over the course of the year on each gallon of gasoline and diesel they produce for consumption within the contiguous 48 states and Hawaii. Will EPA require these Obligated Parties to retire RINs on a daily, weekly or monthly basis? If so, exact production numbers are often not known for certain until several weeks or a month after the product has been refined due to evaporation, reconciliation and losses that occur, to say nothing of changed business plans. In an attempt to avoid non-compliance, any overly strict time frame for RIN retirement will likely result in Obligated Parties over-retiring RINs. The burden of constant retirement obligations would be high, and seems in stark contrast to this Administration’s goals of lessening compliance obligations and regulatory burdens. The market could also be further disrupted when RINs would need to be refunded to refiners any time an exemption is granted midway through a compliance year as EPA did last year and anticipates doing this year.
 
Next Steps

EPA plans to initiate its rulemaking on this subject in February 2019. The Agency will first release a proposed rule, which will be subject to public comment. The Agency will receive written comments and then publish a final rulemaking that takes into account the comments received from the public. Given what is at stake for the petroleum, renewable fuel and RIN trading industries, it is highly recommend that interested parties engage early with EPA, in the form of a meeting with EPA in person or by conference call, prior to the issuance of any proposed rulemaking.

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