WASHINGTON, Nov. 7, 2013 /PRNewswire/ -- A new analysis by Iowa State University economists Bruce A. Babcock and Sebastien Pouliot of the EPA's ethanol market system finds that it works effectively and as intended in tracking compliance with the Renewable Fuel Standard (RFS).
The RIN market, short for renewable identification number, was created as a tradable commodity to aid in the enforcement of the federal mandate to increase renewable fuel consumption under RFS. Each RIN represents one gallon of ethanol that has been produced and introduced into the market place and ownership of RINs proves compliance with the federal mandate by obligated parties which includes gasoline producers and importers.
"The petroleum industry says that RINs are too expensive and the federal mandate has to be relaxed to deflate RIN prices," stated Bruce Babcock, coauthor of the paper. "So we wanted to assess the RIN market and also determine if recent price volatility was intended or unintended by understanding causal effects."
The cost to obligated parties of acquiring ethanol RINs was not an issue until very recently. Tax credits that expired at the end of 2011 along with market forces were sufficient to incentivize consumption in volumes that exceeded federal mandates. The excess volume was "banked" for future use. The excess of ethanol over the mandates depressed the RIN market, which the paper concludes is the correct market response.
The market became much more active in 2013 as ethanol supplies contracted and higher mandates in 2014 and 2015 were factored into RIN prices. This year RIN prices have traded from less than 10 cents to more than 140 cents per gallon. "The market has reacted exactly as it should by a signaling tight supply of RINs relative to anticipated demand," Bruce Babcock, study coauthor stated. "The petroleum industry request to repeal or reduce mandates to reduce RIN prices is not the only viable option as they state. RIN prices can be reduced by increasing ethanol consumption by expanding market access to E85."
According to the authors, the higher the RIN price the greater the incentive to find lower-cost alternatives of meeting mandates. Costs can be lowered either by decreasing biofuel production costs or by increasing the value of biofuels in the market place. In the paper Babcock demonstrates a scalable model that shows a $325 million investment in E85 infrastructure would reduce compliance costs by $1.75 billion.
Babcock and Pouliot conclude that rather than volatility and high prices being a sign that something was wrong with RIN markets or RFS, RIN prices did their job by signaling that higher ethanol mandates were coming and would be costly to achieve.
"Obligated parties have turned to the EPA and asked for relief rather than create their own relief through expansion of E85 infrastructure, which is the intent of RFS. Stand firm on higher mandates and the market will be opened to E85, and consumption levels will rise. Lower the mandate significantly and it is a signal that the federal government is not committed to expanded consumption of biofuels as envisioned in the RFS."
'The Economic Role Of RIN Prices' is one of three new papers on the RFS published by the Center for Agricultural and Rural Development in recent weeks. The other two—'How Much E85 Can Be Consumed in the United States' and 'RFS Compliance: Death Spiral or Investment in E85?' — are accessible on CARD's website.
About The Center For Agricultural And Rural Development (CARD)
The Center for Agricultural and Rural Development (CARD) was founded by Earl Heady in 1958 and celebrated its 55th anniversary in 2013. Located at Iowa State University, CARD conducts innovative public policy and economic research on agricultural, environmental and food issues. CARD researchers develop and apply economic theory, quantitative methods, and interdisciplinary approaches to create relevant knowledge that is communicated to policy makers and policy stakeholders.
SOURCE Center For Agricultural And Rural Development (CARD)