In what could foreshadow even further scrutiny of trading activities in the Renewable Identification Number (RIN) market, the Renewable Fuels Association (RFA) has asked the Environmental Protection Agency (EPA) and the Commodity Futures Trading Commission (CFTC) to investigate potential manipulation of the market for RINs, which are valuable credits generated by renewable fuel producers under the federal Renewable Fuel Standard (RFS). RINs are freely traded and must ultimately be purchased by refiners and gasoline and diesel importers for compliance with the RFS. RFA’s request was made in a letter to the agencies and represents the first public test of the recent memorandum of understanding (MOU) between EPA and CFTC to share information on RFS RIN market issues. While it is not certain that the letter will directly lead the agencies to investigate manipulative behavior in the RIN markets, it highlights the mounting pressure on the agencies to investigate and bring significant enforcement actions if any manipulative behavior is discovered.
Therefore, in light of the likelihood of increasing scrutiny, participants in the RIN markets, including refiners, commodity traders, renewable fuel producers and RIN traders, should continue to ensure that their activities do not interfere with the free operation of not only the RIN markets, but also the underlying renewable fuel markets as well as the gasoline, diesel and agricultural markets.
RFA’s Call for Investigation
In its letter, RFA noted a recent spike in ethanol RIN prices, rising from approximately $0.75 in late May to nearly $1.00 presently. RFA alleged that these prices are not driven by market fundamentals and do not account for record levels of ethanol production in 2015 and production levels so far in 2016. Furthermore, RFA cited ethanol production trends as an indicator that 2016 and 2017 ethanol production will exceed the volumes mandated in 2016 and in EPA’s RFS proposal for 2017. Based on this trend, RFA stated that prices are driven by “something other than basic supply-demand fundamentals” and alleged that higher RIN prices are the result of manipulation by opponents of the RFS. Certain anti-RFS efforts are focused on repeal of the program, and RFA suggested that driving up RIN prices will provide opponents with further evidence to support repeal. RFA asked EPA and CFTC to “explore” the “true causes” of volatility in the RIN markets.
Other market participants and observers have attributed the recent rise in RIN prices to an expected shortfall of RINs necessary for compliance with EPA’s proposed 2017 RFS mandates. RFA’s letter does not address these alternative explanations.
Regardless of the true causes of the recent increase in prices, past experience with RIN market volatility, including a dramatic spike in RIN prices in the summer of 2013, makes it increasingly likely that both EPA and CFTC will take steps to investigate the current RIN markets.
EPA-CFTC Cooperation on RIN Market Issues
Any action by EPA and CFTC would represent the first direct joint investigation of RIN market manipulation since the agencies agreed to share information on issues in RFS markets earlier this year. While EPA in the past has pursued a number of enforcement actions involving failure to retire RINs that may implicate manipulation concerns, none of them have focused solely on market manipulation. The MOU represents a new avenue of focus in enforcement actions. Specifically, the MOU allows EPA and CFTC to share information, including proprietary business information, on activities under the RFS with the goal of furthering each agency’s regulatory and enforcement responsibilities.
Under the MOU, the agencies agreed to provide each other with information on the RIN and renewable fuels markets. The MOU broadly covers the information that EPA requires companies to submit under the RFS program and may even include information provided in response to agency inquiries including requests for information and audits. Additionally, the MOU allows EPA to provide CFTC with direct access to EPA’s databases of RIN transactions, including information on individual trades. The EPA and CFTC also agreed to coordinate oversight, investigative and enforcement activities where possible.
The MOU is significant because it reflects EPA’s and CFTC’s increased concern about trading practices and market manipulation in environmental credits and the underlying renewable fuel markets over the past three years. Further, it builds off efforts by both agencies to step up enforcement in this area over the last few months. For example, earlier this year, EPA issued a new penalty policy for violations of its other mobile source programs, and CFTC has long been interested in RIN markets going back to a 2013 meeting of its Agricultural Advisory Committee on the impact of the RIN markets.
Potential for Increased Agency Scrutiny
RFA’s call for an investigation of the RIN markets by EPA and CFTC raises the potential that the agencies will take real steps to explore the recent volatility in RIN prices. These efforts could lead to the agencies requesting information from market participants in an effort to determine whether any manipulative actions have occurred and may eventually lead to enforcement actions if any manipulative activities are uncovered.
These actions would be in line with calls for increased scrutiny of the RFS market that often accompany higher RIN prices. For example, when prices spiked in the summer of 2013, U.S. Senator Ron Wyden requested information on unusual RIN trading activity. Many other members of Congress, as well as the House Committee on Energy and Commerce and the Senate Environment and Public Works and Environment and Natural Resources Committees also took actions to investigate the RIN markets. The RFS remains a hot topic, and the upcoming elections may provide an incentive for members of Congress to take an interest in any unusual activity in the RIN markets.