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Renewable Fuel RIN Categories and Factors Impacting Value of RINs

EISA created new categories and requirements of renewable biofuels.  The NPRM establishes a regulatory system to enforce EISA’s requirements.  As under RFS 1, RINs will be the tool of compliance for obligated parties who are subject to the mandates.  Unlike RFS 1, there will be four different categories of RINs.  These RIN categories are not completely distinct, however, with significant overlap between the categories and some fuels qualifying for multiple categories.  To assess the value of RINs under the new system, it is necessary to examine the interaction between the various categories as well as the new approaches to allowances and equivalence values that the EPA has proposed.  This examination will be focused on the factors most likely to impact the RIN value of fuel produced from algae.

Renewable Fuel

Renewable fuel was the basis for all RINs under RFS 1 and was defined generally as “any motor vehicle fuel that is used to replace or reduce the quantity of fossil fuel present in a fuel mixture used to fuel a motor vehicle.”  Renewable Fuel remains the broadest category under RFS 2 and would encompass all subcategories of fuel under the regulation.  The definition of “Renewable Fuel” has changed substantially to the following:

Renewable fuel means a fuel which meets all of the following:

(1) Fuel that is produced from renewable biomass.

(2) Fuel that is used to replace or reduce the quantity of fossil fuel present in a transportation fuel, home heating oil, or jet fuel.

(3) Ethanol covered by this definition shall be denatured as required and defined in 27 CRF parts 19 through 21.  Any volume of denaturant added to the undenatured ethanol by a producer or importer in excess of 5 volume percent shall not be included in the volume of ethanol for purposes of determining compliance with the requirements under this subpart.

NPRM at 480.

The change included in subpart (2) of the definition reflects the expansion of RFS to encompass home heating oil, jet fuel, locomotive fuel, and other fuels beyond the previous motor vehicle fuel limitation.  The renewable biomass requirement in (1) is imposed on the subcategories of renewable fuels as well.  As will be discussed later, the renewable biomass requirement will have different significance in different contexts depending on the GHG reductions required.

The Renewable Fuel category may best be described as the lowest rung, catch-all category.  Obligated parties will be required to meet their specified RIN obligations in the various specific categories and will be able to utilize excess RINs from those categories to satisfy the Renewable Fuel category.  Depending on whether there is a substantial premium value to these specific category RINs, obligated parties may use them to satisfy their Renewable Fuel category obligations or sell them on the market where they could also acquire RINs to cover their deficit.  It is to be expected that some market participants will utilize these higher value RINs to satisfy their Renewable Fuel obligations as a matter of convenience but only to the extent they have relatively few surplus higher value RINs.

Biomass-Based Diesel

“Biomass-Based Diesel” is defined as a Renewable Fuel that is either biodiesel as defined by ASTM D6751 07 or a non-ester renewable diesel.  Renewable fuel that is coprocessed with fossil fuel is expressly defined as not Biomass-Based Diesel.  To qualify for the Biomass-Based Diesel designation, biodiesel must qualify for a D code of 2.  The cross-referenced section is a chart that provides the approved pathways for renewable fuel production.  The pathway variables are the feedstock utilized and the production process requirements.  The chart for biodiesel has two distinct pathways; both utilize transesterification as the production process, but the feedstock is distinguished between “soybean oil and other virgin plant oils” in one pathway and “waste grease, waste oils, tallow, chicken fat, or non-food grade corn oil” in the other.  Only the nonvirgin oil pathway qualifies with a D code of 2, thus any soy or other vegetable oil biodiesel does not qualify under the definition.  Notably, non-ester renewable diesel is not required to achieve a D code of 2 to be qualified as Biomass-Based Diesel.  Since there are no algae biofuels in commercial production at this time, algae biofuel has not been assessed or assigned a fuel pathway by EPA.  This is one of the two high-value categories where algae biofuel is most likely to qualify as a compliance fuel.

The lifecycle GHG threshold specified for Biomass-Based Diesel under EISA is a 50 percent reduction.  The EPA is authorized to adjust these performance thresholds downward by as much as 10 percent but has not indicated an intention to reduce this threshold down for this category of fuel.

Advanced Biofuel

Advanced Biofuel “means renewable fuel, other than ethanol derived from cornstarch, that qualifies for a D code of 3 pursuant to §80.1426(d).”  Except for the express exclusion of cornstarch feedstock (which exclusion is established by EISA), Advanced Biofuel may be regarded as the most flexible of the subcategory Renewable Fuels.  The D code of 3 establishes that the EPA has found that the particular fuel pathway meets the RFS 2 GHG performance requirements sufficiently to warrant categorization as an “Advanced Biofuel.”  In effect, the EPA has defined these fuels based on GHG performance criteria and is utilizing the D codes as an approval code to signify qualification.  As previously mentioned, algae biofuel has not been assessed or assigned a fuel pathway by EPA.  This is the second of the two high-value categories where algae biofuel is most likely to qualify as a compliance fuel.

The lifecycle GHG threshold specified for Advanced Biofuels under EISA is a 50 percent reduction.  The EPA is authorized to adjust these performance thresholds downward by as much as 10 percent.  The EPA has proposed that the GHG threshold be reduced for Advanced Biofuels (and D code 2) to 44 percent or perhaps as low as 40 percent.  This reduction is intended to enable to qualify the ethanol fuel pathway that utilizes sugarcane to achieve compliance.  NPRM at 24.

Cellulosic Biofuel

Cellulosic Biofuel “means renewable fuel derived from any cellulose, hemi-cellulose, or lignin that is derived from renewable biomass and that qualifies for a D code of 1 pursuant to §80.1426(d).”  Thus, unlike Advanced Biofuel, Cellulosic Biofuel must originate from referenced cellulosic feedstocks.  It also must qualify for a D code of 1, which corresponds to the most rigorous GHG emissions performance of a 60 percent reduction.  The EPA has not indicated an intention to reduce this threshold.  Because of the cellulosic content requirement, it is not anticipated that algae biofuel will qualify for this category.

Relationship Between Categories

Under the proposed system, any fuel that meets the requirements for Cellulosic Biofuel or Biomass-Based Diesel will fulfill the requirements for Advanced Biofuels.  Similarly, any renewable fuel that meets the requirement for Advanced Biofuels is also valid for meeting the Renewable Fuel requirements.  NPRM at 21.  This is best illustrated by examining the requirements of a particular year.  In 2010, EISA requires 100 million gallons of Cellulosic Biofuel, 650 million gallons of Biomass-Based Diesel, 950 million gallons of Advanced Biofuel, and a total Renewable Fuel requirement of 12,950 million gallons of qualifying fuel.  If one assumes for illustration that no more Cellulosic Biofuel or Biomass-Based Diesel will be produced than is necessary for compliance, the breakdown will be as follows:  100 million gallons of Cellulosic Biofuel (D Code 1), 650 million gallons of Biomass-Based Diesel (D Code 2), 200 million gallons of Advanced Biofuel (D Code 3), and 12 billion gallons of Renewable Fuel (D Code 4). 

To further illustrate how the system will work in practice, it is useful to consider several specific fuel pathways under consideration.  Under the NPRM, the EPA has found that the soy biodiesel pathway is insufficient to meet the requirements for the fuel to qualify as a Biomass-Based Diesel (which was the category that it was previously assumed would include soy biodiesel).  The soy biodiesel would next be considered for the possibility of qualifying for D Code 3 and being classified as Advanced Biofuel.  If it met this criterion, then it could be used for Advanced Biofuel compliance but not Biomass-Based Diesel compliance.  A review of Table 1 to section 80.1426 reveals that the soy biodiesel falls short of the Advanced Biofuel criteria, as it has a D code 4, which means it may only be utilized for Renewable Fuel compliance.  Ethanol made from sugarcane sugar with process heat derived from sugarcane bagasse, on the other hand, is shown on the table as qualifying with a D code 3.  As previously noted, this qualification is based on the EPA loosening the requirements for the Advanced Biofuel category from 50 percent GHG reduction to 44 or 40 percent.

Equivalence Value of Fuels

Under RFS 1, RIN values were assigned to qualifying fuels based on their energy value in comparison with ethanol.  In addition, the EPA was empowered to establish “appropriate” credit for certain fuels, including cellulosic and waste-derived fuels.  Under the resulting RFS 1 system, on a per-gallon basis corn ethanol received a value of 1.0, butanol 1.3, biodiesel 1.5, non-ester renewable diesel 1.7, and cellulosic biomass ethanol and waste-derived ethanol 2.5.  Thus two gallons of cellulosic biomass ethanol would generate 5.0 RINs.

Under RFS 2, the EPA has proposed substantial changes to the equivalence value system.  However, the NPRM states, “Overall EPA believes that the statute continues to be ambiguous on this issue, and we are therefore co-proposing and seeking comment on two options for Equivalence values.”  The listed options are as follows:

 1. Equivalence Values would be based on the energy content and renewable content of each renewable fuel in comparison to denatured ethanol. . . .

 2. All liquid renewable fuels would be counted strictly on the basis of their measured volumes, and the Equivalence Values for all renewable fuels would be 1.0 (essentially, Equivalence Values would no longer apply).

The EPA proposes to use 77,930 Btu/gal. as the energy content of denatured ethanol, which is slightly different than the previous value of 77,750 Btu/gal.  Under option 1, the EPA would utilize an ethanol-equivalent energy content approach based strictly on energy content.  The prior multiplier factor of 2.5 for cellulosic ethanol would not be utilized.  Instead, all ethanol would be equivalent for volume purposes.  However, fuels with higher energy content per gallon, such as diesel fuel, would receive proportionately greater RINs.

Thus cellulosic diesel fuel would generate RINs at a multiplier factor of 1.7 compared with cellulosic ethanol.  To the extent that diesel fuels comply with either the Cellulosic Biofuel or Advanced Biofuel category requirements, this option would have a significant impact.  The NPRM states that this approach will not be utilized for Biomass-Based Diesel, as Congress intended a straight volume approach in this category and therefore the agency will utilize a 1:1 volume approach in this category.  NPRM at 99 100.

Alternatively, if the EPA opts to follow option 2, equivalence values would be eliminated for all fuels and the relationship would be 1:1 for RIN values for all fuels.

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