Make The Renewable Fuel Standard More Fair–And Effective

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An American flag flies at a DuPont ethanol plant in Nevada, Iowa. The EPA must realign the biofuel point of obligation with the actual point of compliance. (Luke Sharrett/Bloomberg)

Forbes’ August 29 post titled “A Wealth Transfer from Refiners to Ethanol Producers” accurately highlights a problem with the Renewable Fuel Standard (RFS): Our government currently makes the wrong entities comply with its mandates. In examining this complex program, the writer correctly describes the problem that it creates for independent refiners, who are obligated to comply with the mandate yet largely beholden to other entities to live up to its requirements.

Nevertheless, the overly-enriched beneficiaries of this asymmetrical arrangement are not, in fact, ethanol producers, as the author of the op-ed maintains. As one of the largest refiners and one of the largest ethanol producers, we at Valero are in a good position to know. The real beneficiaries are, rather, a small group of currently highly-profitable large convenience store retail chains with the necessary resources to blend fuels on their own without the burden of actually complying with the RFS and logistically-advantaged, historically-integrated oil companies. Here’s how this all works.

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Each gallon of renewable fuel produced for sale is given a unique 38-character tracking number called an RIN, or renewable identification number. As the Aug. 29 post described, these RINs are essentially credits that can be used to demonstrate compliance with the mandate—or, if you’re not one of the parties obligated to comply, they can be sold for profit. Those big retail chains are selling their RINs to refiners like Valero, and reaping a windfall profit in the bargain to the detriment of smaller retailers and consumers. The same is happening with the RIN-long integrated refiners which are some of the largest companies in the world.

Ethanol producers themselves do not enjoy windfall RIN profits in this arrangement, as the post suggests. While it’s true that every gallon of renewable fuel has its own RIN, the ethanol RIN does not attain value until the point at which that renewable fuel is actually blended into regular gasoline—produced from crude oil at a refinery or imported from overseas—to make ethanol-blended gasoline. When that blending takes place, the RIN is unlocked from its gallon of renewable fuel, gathered up by the blender, and made available for sale to refiners or importers, who are the obligated parties under the program.

So the problem is not that ethanol producers are being enriched by the program. The problem is that the point in the fuel stream where parties are obligated to establish compliance by surrendering sufficient RINs is also the point where the ability to actually blend biofuels is most limited—at the refinery gate. The solution is to make a straight-forward regulatory change to realign the obligation to blend biofuels with the incentive to do so, and at the point in the fuel stream with the best opportunity to blend.

The most efficient way to meet the goals of the RFS and achieve compliance with the program would be to maximize the amount of actual gallons of biofuels being blended as the primary compliance tool. There is a simple solution to do that: The EPA must realign the point of obligation (currently with refiners and importers) with the actual point of compliance—the owner of the hydrocarbon at the terminal, where the fuel is actually blended. This would insure that all hydrocarbon gallons are proportionally obligated under the program, and that some parties are not unfairly burdened under the program while others are artificially enriched.

The Environmental Protection Agency (EPA), which oversees the RFS, has the authority to accomplish this administrative improvement through an open and transparent regulatory rulemaking process by proposing to change the definition of Obligated Party from refiner to “rack seller” (fuel is blended “at the rack”).

This definitional change would not significantly increase the number of obligated parties under the program, roughly 90% of whom would be the same entities. It would simply realign the obligation to blend biofuels with the incentive to do so at the point in the fuel stream where the blending takes place. The change would reduce RIN speculation, enhance competition, and improve both the integrity and overall administration of the program—thus advancing the interests of those who support a well-functioning renewable fuels program.

Let’s move the point of obligation now and make the RFS more fair and effective.