Dear Chair Boxer and Ranking Member Vitter,
The impact of the Renewable Fuel Standard’s RIN (Renewable Identification Number) credit program on gasoline and ethanol markets is certain to emerge as a topic of discussion at the Committee’s December 11th oversight hearing on domestic renewable fuels. Therefore, I am writing to provide additional perspective on the importance of a viable RIN market to future growth in domestic renewable fuels production, and to correct prevalent misconceptions about the influence of RINs on consumer fuel prices.
In essence, a RIN is a unique “serial number” that commemorates the production of one gallon of ethanol. The RIN is attached to the gallon of ethanol at the point of production and generally remains affixed to the gallon throughout the supply chain. Thus, when a blender or refiner purchases a gallon of ethanol, it is also receiving the attached RIN (at no additional cost). The RIN is separated from the gallon when the ethanol is physically blended with gasoline by an obligated refiner or blender. At this point, the RIN becomes an instrument for demonstrating compliance with annual RFS blending requirements; the obligated party ultimately surrenders the RIN to the Environmental Protection Agency (EPA) to prove that the blending requirement was satisfied.
Importantly, RINs have a two-year compliance life and may be banked or traded to other parties. As such, if an oil company blends more ethanol than is required by its respective renewable volume obligation (RVO), it obtains more RINs than are needed and it may sell them to other obligated parties who blended less ethanol than required. EPA developed a moderated trading platform to facilitate the transaction of RINs amongst obligated parties and other RIN owners.
In addition to providing compliance flexibility for obligated parties, the RIN system was expressly designed to stimulate investment in expanded renewable fuels production and distribution capacity. As renewable fuel blending requirements approach or exceed perceived market barriers such as the 10% ethanol (E10) “blend wall,” demand for detached RINs for compliance will increase and, naturally, prices will rise. When RIN prices are lower than the equivalent cost of installing high-level ethanol blend infrastructure, obligated parties will purchase RINs on the open market to cover blending obligations above the E10 “blend wall.” But as demand for RINs increases and prices rise, rational obligated parties will, at some sustained price point, find it more economical to invest in the infrastructure necessary to distribute high-level ethanol blends than it is to purchase RINs on the open
market. As explained by Iowa State University Economics Professor Bruce Babcock, “The cure for high compliance costs is investment in E85 and E15 infrastructures, which, in turn, would allow for the higher future biofuel consumption levels that are envisioned in current policy.”1
As part of their ongoing effort to undermine the RFS and cloud the debate over the program’s benefits, oil companies have suggested that higher RIN prices translate into higher fuel prices for consumers. However, there is absolutely no evidence to support this claim. Data clearly indicate that higher RIN prices in 2013 did not have any discernible impact on gasoline prices. Retail gasoline prices in 2013 followed the same seasonal pattern as in previous years but actually showed less seasonal volatility than in the previous two years (Figure 1, attached). Further, the relationship of retail gasoline prices to crude oil prices (as measured by the difference between retail gasoline prices and Brent crude oil prices) was also historically normal (Figure 2). This indicates there was no refiner “markup” of gasoline prices to offset RIN “costs.” Finally, there was no correlation whatsoever between RIN prices and retail gasoline prices in 2013; in fact, there were many instances during the year when gasoline prices were falling as RIN prices were rising, and vice versa (Figure 3).
There are simple explanations for the disassociation of gasoline prices and RIN prices. First, RINs are primarily traded in a “closed loop” market amongst parties in the gasoline supply chain. That is, a party buying a detached RIN will incur an additional cost, but the counterparty selling the RIN will simultaneously incur a profit. In this manner, one party’s RIN expense is exactly offset by the counterparty’s RIN revenue, and the net effect is no impact to the consumer. Second, the gasoline market is highly competitive and market actors are compelled to match, or undercut, the wholesale selling prices of their competitors. Thus, a refiner who has purchased RINs on the open market cannot markup the selling price of its gasoline to recoup RIN expenses if it wishes to remain competitive with other refiners who profited from the sale of detached RINs.
In short, there are winners and losers in the RIN market, but because the system is essentially a closed loop, retail gasoline prices are unaffected. A number of refiners and blenders substantiated the “zero sum” nature of the RIN market in financial earnings statements.2 In addition, an official with the Energy Information Administration recently confirmed the absence of any connection between RIN prices and retail gasoline prices, stating, “To date, there is no evidence that retail gasoline prices have been affected by high RIN prices. While the cost of refined gasoline blendstock can be affected by high RIN prices, the increased cost to gasoline blenders is almost exactly offset in 2013 by their increased revenue generated from the sales of RINs separated when they blend ethanol into gasoline.”3
In fact, there is evidence that higher RIN prices actually led to lower fuel prices for consumers of high-
level ethanol blends in the summer of 2013, when RIN prices were elevated. Progressive fuel blenders and retailers purchased ethanol (with free RINs attached), blended it to make E85, separated the RINs from the gallons, and sold the RINs to refiners who had stubbornly chosen to buy RINs rather than physical gallons of ethanol. Thus, the revenue from the sale of the RIN allowed enterprising retailers and marketers to reduce the price of the E85 for the consumer. In many cases this spring and summer, E85 was priced at a 25-35% discount to regular E10 gasoline. In response to these discounts,
2 See a summary of refiner and blender earnings statements regarding RINs at http://ethanolrfa.org/exchange/entry/what-do-big-oils-quarterly-earnings-say-about-the-real-impact-of- rins-on-u/
3 Presentation by Mindi Farber-DeAnda, EIA Office of Petroleum, Natural Gas, and Biofuels Analysis to Advanced Biofuels Association. November 20, 2013. Washington, D.C.
consumer demand for E85 increased dramatically. Data from the Minnesota Department of Commerce, for example, show that E85 sales nearly doubled from April to May as RIN prices increased (Figure 4). Additionally, the emergent E85 value proposition, enabled by RINs, has driven retailers to install an estimated 200 new E85 pumps since the beginning of the year.4 Indeed, E85 prices, sales volumes, and infrastructure development during the summer clearly demonstrated that the RIN mechanism will work exactly as intended to drive expansion of renewable fuel consumption and investment.
Unfortunately, EPA’s recent proposed rule for 2014 RVOs—which includes substantial cuts to statutory blending requirements—has halted the transformation of the liquid fuels marketplace just as it was getting started in earnest. EPA’s proposal greatly diminished the economic incentive to invest in high-ethanol blend infrastructure and has impaired the ability of retailers to offer E85 at steep discounts to E10. By adopting the oil industry’s “blend wall” concept, EPA’s proposal emasculates the
RIN mechanism and totally eliminates the means of driving investment in expanded renewable fuel production and distribution infrastructure.
In light of these facts on the RIN market, we hope the Committee will join the biofuels industry in encouraging EPA to finalize a 2014 RVO rule that reinvigorates the RIN market and restores the incentive to expand renewable fuel distribution capabilities. Our message is simple: let the RFS work and let the RIN market function as intended. Failure to do so will permanently alter the course of the RFS and will only solidify our nation’s dependence on carbon intensive fossil fuels.
Please do not hesitate to contact me should you have questions or comments regarding the contents of this letter.
December 11, 2013
The Honorable Barbara Boxer
Chair Committee on Environment and Public Works U.S. Senate
The Honorable David Vitter
Committee on Environment and Public Works U.S. Senate