RIN Values: What Do They Tell Us about the Impact of Biofuel Mandates?
The impact of the US drought on the price of corn and other feed grains and oilseeds has made the arcane subject of Renewable Identification Number (RINs) and the role of US biofuel policy of great interest this year. For example, there have been a number of recent calls to the EPA for waivers of the RFS mandates to relieve pressure on food prices for consumers and feed prices for livestock producers. In this post we review the basic economics of the ethanol market both with and without the RFS mandate, and discuss RIN valuation under both conditions. We then provide some speculation as to the support the RFS mandates are currently providing to corn prices based on recently observed RIN prices.
Renewable identification numbers are the tracking instrument and bellwether of US biofuel mandates.
US energy policy mandates minimum levels of biofuel use. The four interdependent mandates of the 2007 legislation - EISA - are defined by their feedstocks and greenhouse gas reduction targets, and are each set to rise over the coming years. If the volumes of use would be below the mandated amount, due perhaps to a low petroleum price or some other circumstance, then the mandate becomes binding. It forces fuel blenders to bid higher the price at which they buy biofuel and discount the price at which they sell biofuels. Conversely, if biofuel use would exceed the mandated volumes anyway, then this policy will not affect markets. Renewable Identification Numbers (RINs) are the traded instruments for implementing these mandates, and key indicators of the degree to which mandates affect biofuel markets, if at all. RIN values will rise if the mandate is binding, as fuel blenders scramble to get enough RINs to meet their mandates. A high RIN price signals that this policy affects biofuel markets, and consequently probably drives agricultural commodity prices higher. But the EISA gives considerable flexibility that will affect RIN values in practice, causing great uncertainty about how they will affect biofuel markets and, through them, agricultural commodity markets. Copyright (c) 2009 The Authors. Journal compilation (c) The Agricultural Ecomomics Society and the European Association of Agricultural Economists 2009.
Full Throttle U.S. Ethanol Expansion Faces Challenges Down the Road
Constraints to future growth of the ethanol industry will present challenges to meeting the ambitious mandates for expanded biofuel use set forth in the Energy Independence and Security Act of 2007. New production technologies and supporting infrastructures will be needed to reach cellulosic biofuel mandates. Most U.S. motor vehicles are restricted by manufacturers’ warranties to use gasoline containing no more than 10 percent ethanol, which will limit growth in biofuel demand.