Renewable Transport Fuel Obligation (RTFO) came in to effect on the 15th of April 2008 and is set to last for a period of no less than ten years. The purpose of the obligation is to ensure minimum levels of biofuels are supplied within the UK to combat the UK's contribution to climate change and its reliance on fossil fuels. Companies that supply fuels like biodiesel/bioethanol for example will receive Renewable Transport Fuel Certificates (RTFCs). A certificate is electronically credited to the company who pays the duty, one litre of fuel equals one RTFCs.

There are 12 compulsorily obligated fuel producers in the UK; that from April this year must ensure 2.5% of the fuel they supply is from renewable sources. The percentage is set to increase each year, currently up to 5%, by 2010. The obligated companies have three options to enable them to fulfil their obligation.

a) Supplying eligible fuel from renewable sources (biofuels) to customers in the UK. If the obligated parties chose to supply biofuels, they will demonstrate their compliance through a certification system using RTFCs. The certificates will provide evidence that the specified quantity of biofuels had been supplied to a customer in the UK.

b) Buying RTFCs the obligated parties will be able to trade RTFCs among themselves. They can choose to purchase RTFCs from the market and present these as an alternative to presenting RTFCs obtained for directly supplying biofuels themselves.

c) Paying a buyout price rather than supplying biofuels. Under this arrangement an obligated party will face a pre-determined monetary penalty – 'a buy-out price' – for each unit of shortfall between their overall obligation level and the number of RTFCs surrendered to the Administrator.

The buy out price as mentioned above is currently set at 15 pence per litre. Money paid by obligated companies are collected in a ‘buy out fund’ which is operated by the administrator. At the end of each obligation period (currently the first period is estimated to be November 2009) the buy out fund will be redistributed to companies who have redeemed RTFCs with the administrator. It should be noted that the buy out fund relies on the obligated companies paying the buy out price, should they decide to satisfy their obligation by other methods then the fund will not be able to effectively pay out. Any money in the buy out fund will be distributed as follows: total buy out fund divided by the total number of RTFCs redeemed, this value is then multiplied by the number of RTFCs redeemed by an obligated or non-obligated party.

An obligated company is a supplier of more than 450000 litres of per annum of fossil fuel. A non obligated company is suppler of less than 450000 litres per annum of fossil fuel, or a biofuels producer. For example a company the produces only biodiesel small or large scale is not automatically obligated, but is entitled to register and claim RTFCs if so desired.

Should a non-obligated company decide to register and claim RTFCs they could then leave the certificates as redeemed with the administrator or trade the certificates with obligated companies. By leaving the RTFCs as redeemed there is no guarantee of receiving any cash or agreeing a price, as the fund is reliant on other companies paying the buy out price; and is then distributed as described above. Trading the certificates is a more certain option enabling an upfront agreement for valuing the certificates; and also alleviates waiting for the end of an obligation period.